POLITECNICO DI MILANO Facoltà di Ingegneria dei Sistemi

POLO REGIONALE DI COMO Master of Science in Management, Economics and Industrial Engineering

INTERNATIONAL FRAGMENTATION OF PRODUCTION OF THE AUTOMOTIVE INDUSTRY IN ARGENTINA

Master Graduation Thesis by

Matias Ubogui

Student ID: 736533

Supervisor: Prof. Lucia Tajoli

Academic Year 2009/2010

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Acknowledgments

I would like to thank ICE-Unioncamere for the generous support that I received through their

scholarship ‘Invest your talent in Italy’ to sustain my master studies away from my home

country.

My gratitude to the Politecnico di Milano for opening their doors to international students

and giving me the opportunity to learn inside and outside their classrooms.

A special mention to Como City, including its weather and its Lake, for being the place that

warmly hosted me and the other students during this last years.

I would like to express my gratitude to my Thesis supervisor, Prof. Lucia Tajoli for her always

valuable advices, suggestions and constant support during the whole work. I really enjoyed

the time while working in this research.

A big thanks to my friend and economist Diego Silva for the material provided and our on-

line academic discussions.

I would also like to thank all the fantastic friends that I get to know in Como during this

wonderful years and that are now spread all over the world. So a big thanks to them in the

US, Mexico, Brazil and Spain. A huge thanks for the ones that are now in Italy as well.

I want to give thanks to my roommates, Maksim Palienko and Nicolas Zappacosta for sharing

the blue roof of Pannilani with me. I also thank the big and supportive Argentinean

community of the North of Italy.

My very-very special thanks to Mrs. Geanna Orynbasarova for her always special support.

I want to thank a lot the support of all of my friends in Argentina, from NUCA, and from life.

I would like to thank all my family in Argentina: my cousins, aunts, uncles, the new nephew,

and my grandmother, they showed a strong affection beyond any distance. My grandmother

also showed me some unique recipes at the distance.

Finally I would like express my love and very deep gratitude to my parents Beatriz and Jorge,

and my brother Joaquin, for being always supporting and contributing to my projects of life,

and to my life itself.

This Thesis is dedicated to my grandfather, Alberto Ubogui.

Y si hay lágrimas, que sean de felicidad!

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Abstract

The purpose of this Thesis is to investigate the effects and the role of Argentina regarding

the International Fragmentation of Production phenomenon in the Automotive Industry. An

analysis showed the major importance of the international fragmentation of production in

the automotive industry. The relevance of the economies of scale for each Production Block

in the overall efficiency of the international production process was underlined. Benefits of

international fragmentation like technology transfer and the possibility to be competitive at

a global scale with only one specific part of a major process are particularly important for

developing countries.

In the last ten years the Argentinean Automotive Industry experienced a continuous growth,

and through this research we understood that it was partially due to the complementation

of production in the Mercosur Regional market. We also detected that general macro-

economical decisions of the country have strong influence in the Argentinean automotive

industry.

This research confirmed that the trends regarding fragmentation of production of vehicles

and parts within the Mercosur Region is significantly driven by the economies of scale. The

analysis showed also which are the market factors that affects the mentioned economies of

scale.

Key Words: Fragmentation, Automotive Industry, Argentina, International, Mercosur

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Table of Contents 1 . Introduction and objective of the work ..................................................................................... 9

2. What is the International Fragmentation of Production? ......................................................... 10

2.1 Trends in Fragmentation ............................................................................................................. 14

2.1.1 Spatial Dimension Trends ..................................................................................................... 14

2.1.2 Specialization Dimension Trends ......................................................................................... 16

2.2 Importance Of Fragmentation in the World Economy ............................................................... 18

2.3 Importance of the Automotive Industry in Fragmentation ........................................................ 19

2.4 Effects of Fragmentation in Developing Countries ..................................................................... 20

3. The Automotive Industry ........................................................................................................ 25

3.1 Relevance for the World Economy.............................................................................................. 25

3.2 Trends in production and organization ....................................................................................... 28

3.2.1 Growing importance of Developing Countries in Production and Sales .............................. 28

3.2.2 Increasing Concentration of players .................................................................................... 31

3.2.3 The changing relationship between assemblers and suppliers ........................................... 33

3.2.4 An increasing standardization of platforms and models ..................................................... 37

3.3 A Global Automotive production System .................................................................................... 38

3.3.1 Follow Sourcing .................................................................................................................... 38

3.3.2 Centralization and Decentralization of international value chain ....................................... 41

3.3.3 Global supply networks ........................................................................................................ 45

3.4 Regional Production Networks.................................................................................................... 50

3.4.1 The North American production system .............................................................................. 50

3.4.2 The European production system ........................................................................................ 51

3.4.3 The ASEAN production system ............................................................................................. 51

3.4.4 The Mercosur production system ........................................................................................ 52

4. The Argentinean Automotive Industry ..................................................................................... 55

4.1 Argentinean Automotive Industry History .................................................................................. 55

4.1.1 From its origin until 1991 ..................................................................................................... 55

4.1.2 From 1991 until the crisis of 2001 ........................................................................................ 56

4.2 Actual situation of the Argentinean Automotive Industry .......................................................... 60

4.2.1 The Vehicles Industry ........................................................................................................... 61

4.2.2 The Parts and Components Industry .................................................................................... 63

5. Fragmentation of Automotive Production in Argentina ............................................................ 65

5.1 What parts of the automotive production process can be fragmented? ................................... 65

5.2 The Actual level of Fragmentation .............................................................................................. 67

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5.2.1 The First Level: Regional or Centralized production? .......................................................... 67

5.2.2 The Second Level: Splitting R&D and Production................................................................. 68

5.2.2.1 The Fiat Palio Case ............................................................................................................. 68

5.2.3 The Third Level: Splitting between Assembly and Supply of parts and components .......... 70

5.2.4 The Fourth Level: Complementary Production of vehicles between Argentina and Brazil . 71

5.2.5 The Fourth Level: Local, Regional and Global Sourcing of Parts and Components ............. 74

5.2.5.1 The Volkswagen Cordoba Case ......................................................................................... 76

5.2.5.2 The Plastic Omnium Bumpers Case ................................................................................... 76

5.3 Consequences for the Argentinean Economy and Policy Recommendations ............................ 78

6. Conclusions ............................................................................................................................ 82

7 . Bibliography .......................................................................................................................... 88

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Table of Figures

Figure 2.1 – Integrated Production Systems ......................................................................................... 11 Figure 2.2 – Fragmented Production Systems ...................................................................................... 11 Figure 2.3 – Fragmentation Dimensions ............................................................................................... 13 Figure 2.4 – Ratio of world exports to GDP ........................................................................................... 14 Figure 2.5 – Transaction Costs .............................................................................................................. 17 Figure 2.6 – Transaction Costs: effect of reduction in Transactional Costs .......................................... 18 Figure 2.7 – Share of 1995 OECD imports of parts and components ................................................... 19 Figure 3.1 – Production of motor vehicles by region in 1990, 1997 and 2005 ..................................... 30 Figure 3.10 – Value of procurement per source for Dacia Logan in 2008 ............................................ 48 Figure 3.11 – Number of Suppliers per source for Dacia Logan in 2008 ............................................... 49 Figure 3.12 – Automotive trade between Argentina and Brazil in 1990 and 1996 .............................. 54 Figure 3.2 – Production Share of motor vehicles manufacturers ......................................................... 32 Figure 3.3 – Actual organization of the Automotive Industry ............................................................... 34 Figure 3.4 – Employment in motor vehicle assembly and supplier industries in the US between 1979-

1998 ................................................................................................................................................... 37 Figure 3.5 – Valeo’s expansion of production sites between 1986 and 1997 ...................................... 40 Figure 3.6 – Centralization – Decentralization configuration strategies ............................................... 42 Figure 3.7 –Automobile Production process ......................................................................................... 43 Figure 3.8 – Design function in Global Supply Networks ...................................................................... 46 Figure 3.9 – Flow of Materials in Global Supply Networks ................................................................... 46 Figure 4.1 – Automotive production of Argentina between 1959 and 2010 ........................................ 56 Figure 4.2 – Productivity of labor in Argentinean automotive industry between 1959 and 2005 ....... 58 Figure 4.3 – Productivity of labor in the automotive industry for selected countries in 1998 and 2001

........................................................................................................................................................... 59 Figure 4.4 – Announced investments in the Argentinean automotive industry between 2002 and 2008

........................................................................................................................................................... 60 Figure 4.5 – Employment in the Argentinean automotive industry between 2002 and 2008 ............. 61 Figure 4.6 – Destination of Argentinean exports of motor vehicles in 2009 ........................................ 62 Figure 4.7 – Parts and Components trade of Argentina between 1995 and 2009 ............................... 63 Figure 4.8 – Destination of Argentinean exports of automotive parts and components in 2010 ........ 64 Figure 5.1 – Fragmentation Map of Automotive Production in Mercosur .......................................... 66 Figure 5.2 – Relationship between International Fragmentation of Production and Market Size ...... 68 Figure 5.3 – Relationship between International Fragmentation of R&D and Value Added of R&D .. 69 Figure 5.4 – Argentinean Balance of Trade with Brazil for Automotive categories between 1991 and

2009 ................................................................................................................................................... 70 Figure 5.5 – Unit sales per type of vehicle in Argentina in 2009 .......................................................... 73 Figure 5.6 – Relationship between Fragmentation of Production in Argentina of different Segments

and Relative Market Share of those Segments in comparison with Brazil ....................................... 74 Figure 5.7 – Relationship between International Fragmentation of Production of Parts and

Technological Complexity of the Part ............................................................................................... 78

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Tables

Table 2.1 – 2010 Purchasing Power and Wage Rates for selected countries ....................................... 23

Table 3.1 – Direct employment in the automotive industry per country in 2004 ................................ 26

Table 3.10 – Automotive trade between Argentina and Brazil in 1990 and 1996 ................................ 54

Table 3.2 – Automotive Industry production by country in 2005 ......................................................... 27

Table 3.3 – Production and Growth rate of motor vehicles by region between 1990, 1997 and 2005 30

Table 3.4 – World motor vehicle production by manufacturer ............................................................ 31

Table 3.5 – Quantity of light vehicle assembly plants in developing countries in the early 1990s ...... 39

Table 3.6 – Quantity of light vehicle assembly plants in developing countries in the late 1990s ........ 39

Table 3.7 – Valeo’s expansion of production sites between 1986 and 1997 ........................................ 40

Table 3.8 Mercedes Class A Sourcing in Brazil in 1997 ......................................................................... 47

Table 3.9 – Components trade between ASEAN-4 countries ............................................................... 52

Table 4.1 – Vehicle exports from Argentina between 2002 and 2008................................................. 61

Table 4.2 – Automotive parts and components exports from Argentina for the 1st semester 2010... 64

Table 5.1 – Balance of Trade of Vehicles and Parts of Argentina with Brazil between 1991 and 2009

........................................................................................................................................................... 70

Table 5.2 – Vehicle models produced in Argentina at March 2011 ..................................................... 72

Table 5.3 – Argentinean Balance of Trade of Parts and Components in 2010 .................................... 75

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1 . Introduction and objective of the work The actual production of automobiles in most countries now makes use of components such

as tires made by French or Italian producers, injection systems produced in Germany and

computer chips manufactured in Malaysia with software developed in the United States.

Automotive companies are immersed in a highly competitive market, in which they are in a

continuous seek for efficiency and driven by a cost-reducing philosophy. As stated by Schmid

(2008), in the global automobile market the competitive position of an individual

manufacturer no longer depends exclusively on traditional factors like productivity or

innovative capacity. Instead, the competitive position is also a function of the design of the

international value chain. A central issue, therefore, is how value activities should be

distributed geographically to enable a company to compete with its rivals, that is how a

producer can be more efficient by Internationally Fragmenting its Production across the

globe.

Main automotive companies (both vehicles assemblers and parts producers) are based in

the United States, Western Europe or Japan, the so called Triad region. In their home

markets, the automotive industry is characterized for being mature and with overcapacity

(Memedovic, 2003). Instead some other emerging markets are experiencing a fast growth, in

this group we can mention China, Eastern Europe, India, Mexico, the ASEAN1 and South

American countries.

In 2010 the Argentinean automotive industry reached a historical record of production of

720.000 vehicles (Urgente24, 2011), and the plans of the Argentinean Association of Vehicles

Assemblers is to finish 2011 with a total production of 840.000 vehicles (ADEFA, 2010).

Those production levels represent about 1 percent of the total world production of vehicles

and positions Argentina in the top 25 automotive producing countries.

In this Thesis I will analyze the state of the art of International Fragmentation of Production

in the automotive industry, and in particular, I will concentrate on how the splitting of the

entire production process affects the Argentinean automotive industry. There are two

questions that I will address regarding the Argentinean production of cars and its

components.

Primarily I will answer the following question: to what extent an automotive producer

company should internationally fragment its production to serve the Argentinean market in

a cost-reducing and efficient way?

Secondly, and as a consequence of the first question, in case some part of the production

process of a vehicle is fragmented efficiently in Argentina, can Argentina become a global

producer of a specific type of vehicle or parts?

1 ASEAN: Association of Southeast Asian Nations, is composed by Indonesia, Malaysia, the Philippines,

Singapore, Thailand, Brunei Darussalam, Burma (Myanmar), Cambodia, Laos, and Vietnam.

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2. What is the International Fragmentation of Production? A definition from R. Jones and H. Kierzowski (2000) states that ‘the term fragmentation

refers to a splitting up of a previously integrated production process into two or more

components, or fragments’. Getting deeper in the same line, Victoria Curzon Price (2001)

considers international fragmentation of production as ‘the growing complexity of the

modern chain of production, which divides and redivides previously integrated systems into

ever more specialized and distinguishable units’. Considering also the geographical factor,

Turkcan (2010) defines fragmentation as a ‘division of the production process into different

locations across different countries’. It is worth to notice at this point that throughout this

Thesis we will refer to ‘International Fragmentation of Production’ indistinctly with the term

‘fragmentation’ or ‘international fragmentation of production’. If international

fragmentation of production means destruction, it is creative destruction. Splitting up an

integrated process into separate chunks of production offers new possibilities for exploiting

gains from specialization. Such fragmentation will probably occur first on a local or national

basis, however, significant reduction in costs of international coordination allow producers

to take advantage of differences in technologies and factor prices between countries, and

design each time more global production systems. The production of automobiles in most

countries now makes use of components such as tires made by French or Italian producers,

injection systems produced in Germany and computer chips manufactured in Malaysia with

software developed in the United States, for example.

The phenomenon of Fragmentation is not new. David Landes (1998), traces the origin of

Fragmentation to the 13th century in Europe. It emerged with the objective of reducing

union controls in the cities, and use abundant and cheap female and child labor force

available in the countryside. The term he used to describe this process was “putting-out”:

“Early on thirteenth century, then, merchant began to hire cottage workers to

perform some more tedious, less skilled tasks. In the most important branch, the

textile manufacture, peasant women did the spinning on a putting-out basis: the

merchant put out the raw material - the raw wool and flax, and, latter, cotton - and

collected the finished yarn”.

In Italy and the Low Countries, cities were complaining about this unfair competition and

severe limits were imposed on the extent of the putting-out activities. As stated by Jones et

al. (2003), seven centuries later, the key political economy issues are not much different, but

addressed on a global scale.

If we consider the production process as a series of production blocks which are connected

by service links, there is a main aspect that will define its efficiency: the economies of scale.

As expected, a larger scale of output can result in a finer division of labor (as stated by Adam

Smith) that will result into more efficient activities within a particular production block. But

also, as proposed by H. Kierzkowski (2000) a larger scale will have an effect reducing average

costs of the services links such as transportation, communication and coordination. Indeed,

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he argue that economies of scale are more likely to be found in services activities than

within production blocks.

In the Figures 2.1 and 2.2, we can see an integrated production system in comparison with a

fragmented production system. In Figure 2.1 we can see the three actors inputs-producer-

customer in comparison to the fragmented and more complex relationships of Figure 2.2

where we now add production blocks and service links to coordinate them.

Figure 2.1 – Integrated Production Systems

Figure 2.2 – Fragmented Production Systems

Fragmentation allows different chunks of a production process to be marketed separately

whereas previously they had to be integrated with only the final product traded on world

markets. This has several advantages because opening to new customers apart from the

original mother’s company allows larger economies of scale and generates additional

An Integrated Production System

Source: Kierzkowski (2009)

Examples of Fragmented Production Systems

Source: Kierzkowski (2009)

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revenues. During the 1990s, several automotive groups generated specialized new

companies that were previously vertically integrated in the whole production process,

providing to the market with intermediate products.

To get deeper into the concept of fragmentation and it different extents, two variables can

be considered (Curzon Price, 2001), so we can understand fragmentation as the combination

of a geographic dimension (the Spatial Dimension) and a set of managerial strategies (the

Specialization Dimension), going from local vertical integration to complete international

outsourcing.

The Spatial Dimension: considers if part of the production system is performed in another

country, with transactions taking place either at arm’s length2 on open markets, or within

the same firm. As we will focus in the production side, the destination of the final product is

not relevant, it might be consumed in the local market or exported. It goes from Locally

produced to High global content.

The Specialization (or Integration) Dimension: The mid 20th century was characterized for the

creation of huge corporate conglomerates in times when the same scientific managerial

approach was considered useful to manage different type of businesses. For example

General electric was known for manufacturing thousands of products and managing

hundreds of separate business units. Nowadays management is downsizing and re-

engineering companies. This is a significant source of specialization fragmentation, as big

conglomerates sells a piece of themselves and new, smaller and more specialized firms

emerge to cover those gaps. An example in the auto industry is the recent downsizing

experienced by the Big 3’s (GM, Ford and Chrysler) after the crisis of 2008, that gave place to

different start-ups of small companies specialized in green technologies for cars. Most of

those companies were founded in Detroit by ex employees of the Big 3’s (Sherman, 2010).

Companies can fragment not only part of its production systems but also managerial

functions, it is increasing the outsourcing of recruitment, billing, accounting and in general

the so called back-office activities. This fragmentation is regulated by the market itself, as

stated by Adam Smith, ‘specialization is limited by the extent of the market’. It goes from

Vertically integrated, unspecialized conglomerates to Highly specialized firms which never

manufacture in-house if it is cheaper to buy it from the market.

Both Spatial and Specialization dimensions can be condensed in Figure 2.3, and inside each

of the four boxes examples are given for each category:

2 A transaction in which buyers and sellers act independently and have no relationship to each other. Both

parties in the deal are acting in their own self interest and are not subject to any pressure or duress from the other party.

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Figure 2.3 – Fragmentation Dimensions

A. Local Firms. In this category fragmentation is not present. There is a tendency in

these firms towards fragmentation (migrating to the ‘B’ box) as a need to survive. For

example the big monopolies in public utilities such as energy, water and telephone

companies have been downsized, re-engineered and divided since privatization and

deregulation appeared.

B. Local Specialized Firms. Within these type of firms fragmentation takes place in a

local context. Construction and building firms are good examples as they are highly

specialized (they even deliver a unique tailored product, as a building), but they

contract out several activities such as concrete filling, pipes installation, glasses and

windows mounting, elevators setting up, etc.

Within this category we can also consider local fragmented firms that are part of an

Agglomeration Complex, like Silicon Valley. Here firms instead of being agglomerated

under a single huge enterprise with the consequent inefficiencies in managing a

complex organization, take advantage of some factors like shared consumers, shared

infrastructure (such as universities), mass production of specialized inputs,

specialized labor, specialized services, informal information flows and the efficiency

of markets as coordinating agents.

C. Multinational Firms Producing Goods Internationally. In this category we can find

large multinational companies using vertically integrated systems to produce

standard goods in different countries. For these firms it is vital to keep control of the

whole production process. An example for this class is Coca-Cola, a firm with

activities fragmented (spatially) worldwide but always under the same corporate

protection.

Vertically integrated.

Coordinated by

Management.

Specialized firm,

contracting out if possible.

Coordinated by Markets.

Goods with high local

content

A. General store in small

town, monopolized public

utilities,vertically

integrated retailers

B. Dentists, building firms,

members of a specialized

cluster

Goods with high

international content

C. Traditional

multinational companies

controlling the whole

chain to preserve know-

how

D. International firms

subcontracting parts of the

production chain

Specialization Dimension

Spat

ial D

ime

nsi

on

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D. The Virtual or Network Corporation. For these companies international

subcontracting is crucial. A good example that also applies to the Auto Industry are

the ‘Maquiladoras’ activity. Here the production process is fragmented into labor-

intensive and capital-intensive chunks and consequently located in low-wage

countries (such as Mexico where currently 1,3 million people are employed in

Maquiladoras) and high-wage countries (such as USA).

Another example are firms that are so specialized and differentiated that they

depend on subcontractors for virtually all their production process. These firms

operate worldwide but they might be located only in one place and will be focused

just in few core activities like design, R&D and marketing.

2.1 Trends in Fragmentation

2.1.1 Spatial Dimension Trends

Regarding this dimension that is driven by the quantity of international content a good has,

as economies are getting more global we can say that there is a trend towards a growing

international fragmentation. To measure international trade and according to the World

Trade Organization (WTO), we will consider the World exports of goods and commercial

services, and to measure the production we will use the Gross Domestic Product (GDP). In

the following figure we show the ratio between international trade and production. As we

can see, the international trade was growing faster than the production from 1985 until

2008, with a significant peak of growth of about 30% between 2000 and 2008.

Figure 2.4 – Ratio of world exports to GDP

Ratio of world exports of goods and commercial services to GDP, 1981-2009

(index 2000=100)

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The drop in 2009 was due to the international crisis that effected the world economy that

year. International trade volumes fell on three other occasions since 1965 (-0,2% in 2001, -

2,0% in 1982, and -7,0% in 1975), but these episodes were of less significant magnitude in

comparison to the 2009’s drop of -12,2%. International Fragmentation itself might also have

inflated the drop of 2009 in comparison with previous declines in the 1970s and 1980s, and

this is due to the growth of global supply chains during the last two decades. As supply

chains become more complex, goods often cross country boundaries several times before

arriving at their final destination. Statistics of international trade record the value of goods

each time the good pass through a national border. When this data is condensed to have the

global international world trade picture, due to this double counting effect, the larger the

supply chains are, the bigger the trade volume number will result. Thus, for a certain fall in

demand in 2009 the effect will probably be a stronger drop in the measure of international

trade than a similar fall in demand in 1975 or 1982 (WTO World Trade Report, 2010).

Because of its very large spot magnitude out of the tendency line, the data for 2009

regarding international trade will not be taken into account when considering the trend in

the Spatial Dimension in Fragmentation.

So, leaving aside 2009 data strongly affected by the International Crisis, we can consider that

international trade is growing. Furthermore, Curzon Price (2001) based on UNCTAD’s annual

study of Foreign Direct Investments, shows that FDI growths even faster than trade

(doubling it from 1992 and 1995). Also, based on the Bank for International Settlements, she

mentions that capital movements and portfolio investments growth even faster for the same

period. This is due to different factors such as reduction in costs of communication and

transportation, diminution and deregulation of trade barriers and an increasing knowledge

of foreign laws and culture that reduces the risk of doing business beyond national

boundaries.

Regarding the decisions of where to source and the roles that regional economic groups like

European Union or Mercosur3 play in it, trade in components within members rise faster

than trade between third countries (Yeats, 2001). This is due not only to the preferential

reduction of trade barriers in regional agreements, but also because trade with other

member countries is perceived as more secure. When deciding where to source

components, if the risk is one of the main drivers, it can favor intra-block trade in these

goods. On the contrary, if the exchange is primarily driven by wage differentials and rising

costs, it might will favor sourcing by third countries.

In terms of numerical relevance in the global economy, a research performed by Hummels et

al. (2001) has found that vertical fragmentation accounts for about 30 percent of world

trade. The research consisted in the analysis of data for 10 OECD countries and input–output

tables from Ireland, Korea, Taiwan and Mexico’s Maquiladoras, accounting with those

3 Mercosur (Mercado Comun del Sur or Southern Common Market): is an economic and political agreement

between Argentina, Brazil, Paraguay and Uruguay.

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countries more than 60 percent of the world trade. Embedded in the definition of vertical

fragmentation, for Hummels research are the following three conditions:

A. a good is produced in two or more sequential stages,

B. two or more countries provide value-added during the production of the good,

C. at least one country must use imported inputs in its stage of the production

process, and some of the resulting output must be exported.

While all intermediate goods trade is consistent with A and B conditions, only the subset of

intermediate goods imports that become embodied in exported goods is consistent with the

C condition. So if we consider only the trade in intermediate goods without requiring them

to be embedded lately in an exported good, the represented share of the world trade could

be even higher than 30 percent.

2.1.2 Specialization Dimension Trends

Regarding the Specialization dimension, the trend is that companies are moving towards

reengineering and downsizing. As an example of reengineering in the auto industry, when

Sergio Marchionne becomes the CEO of Fiat Group in 2004, he created a “do more with less”

program to perform better than their competitors with less resources (Volpato, 2008). This

program pushed a strong differentiation of products but rationalizing the number of

components involved: In 2004 Fiat had 18 different types of heating systems to be

assembled in its vehicles, and by 2012 they will reduce this number to only 5 varieties.

Regarding the downsizing trend, in the last decade General Motors decided to separate a

previously owned company called Delphi (an automotive parts company), to focus in its core

business of making cars, leaving the production of auto parts to the market.

The reason why companies need to downsize and reengineer is because they have a

limitation in managing large activities. This was explained by the Nobel price Ronald Coase,

in 1937, through the transaction costs. The concept of transaction cost refers to the cost of

making an economic exchange. For instance, if someone lives in the suburbs and need to buy

a home appliance in Milano, its transaction costs will not only be the cost of the appliance

itself, but also the cost of reaching the city, the cost of time spent at the shop, etc. With this

theory Coase analyzes why in some cases the coordination is done by the management of a

firm, and why in some others coordination is done with the price mechanism of open

markets. A company can save money by internalizing some transactional costs but only

under certain limits. If what is internalized is a repetitive transaction there is a saving. But in

the case of complex and new activities the decision making process takes more time and

consumes more management resources.

So, the management costs are higher for one-time transactions, decreasing as the number of

transactions increases, and higher again when the complexity increases due to a larger

number of transactions. Transaction costs of market, instead, are lower for few one-time

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transactions, increasing with the number of transactions and decreasing again when very

high number of decisions are involved (Curzon Price, 2001). In Figure 2.5 we represent both

lines:

Figure 2.5 – Transaction Costs

As we can see, there are two break-even points in which the savings by internalizing

transactional costs are equal to the management costs. For a number of transactions in

between Na and Nb, the coordination by the management (vertical integration) is more

efficient than the coordination by the market (outsourcing). For a number of transactions

lower than Na or higher than Nb, the market coordination is less costly than the cost of

management and consequently it is better to outsource.

What is happening in the last years is a significant drop in the Transactional Costs resulting in

an increasing tendency for companies to outsource more and more their non-core activities.

Within the factors of reduction in the Transactional Costs we can count mainly with the

development of internet and the different ways of e-commerce and, in a second line, the fall

in transportation costs.

In particular, in the automotive industry, the use of EDI (Electronic Data Interchange, a way

of transmitting electronic documents or data between two computer systems) allowed the

supply chain to work in real Just in Time, reducing not only transactional costs but also

reaching other benefits such as inventories reduction and more flexible production systems.

In Figure 2.6 we can see the reduction in the transaction costs that moves its line

downwards. As a consequence, the range in which the coordination by the management is

preferred, is reduced from Na-Nb to Na’-Nb’ and the efficiency range of outsourcing is

therefore now larger.

Management Costs

Transactional Costs

Coordination

Costs

Number of TransactionsNa Nb

Source: Curzon Price (2001)

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Figure 2.6 – Transaction Costs: effect of reduction in Transactional Costs

2.2 Importance Of Fragmentation in the World Economy

The fragmentation process is considerably relevant for the World Economy because it allows

to allocate different stages of production where they can be more efficient and at lower

costs. It is also significant because it generates a growing interdependency between

countries as production sharing increases.

One of the earliest forms of fragmentation, was the production of primary commodities in

developing countries, followed by the transportation of those goods to more industrialized

nations for further processing and, finally, a re-exportation of part of the finished products

to the first commodity-producing country of the production chain (Yeats, 2001).

A second model of production sharing between developing and industrial countries emerged

in the 1960s. It consisted in the development of specialized labor-intensive production

within vertically integrated international manufacturing industries. In particular, with the

development of the electronic industry, several producers of radios, televisions, watches and

calculators, began to assemble its different components such as tuners, semiconductors and

valves in Hong Kong and Malaysia.

Considering the increasing trend of fragmentation regarding the Spatial dimension, shown

by a very significant weight of about 30 percent of the world trade (Hummels, 2001), we can

conclude that fragmentation of production has a major and increasing role in the world

economy.

Management Costs

Transactional Costs

Coordination

Costs

Number of TransactionsNa NbNa’ Nb’

Source: Curzon Price (2001)

19

2.3 Importance of the Automotive Industry in Fragmentation

To have an idea of the dominating sectors of international fragmentation of production,

Yeats (2001) studied 44 product groups consisting solely in parts and components that were

identified out of the Machinery and Transport equipment category of the Standard

International Trade Classification4 (SITC 7). This selection was done because international

trade data generally are not differentiated between components and assembled products. In

Figure 2.7 we can see the share in value of the most representative 44 product groups based

on 1995 data of OECD imports.

Figure 2.7 – Share of 1995 OECD imports of parts and components

A strong concentration is present as 4 of the 44 SITC 7 product groups account for over 70

percent of the total trade (in value) in components within OECD5 countries. This top-four

group is formed by: parts of motor vehicles and accessories (SITC 784) which accounts for

more than 25% of the total value traded of 365.806 USD million, in the second place there

are the parts of office machinery (SITC 759) which accounts for an 19%, followed by

telecommunications equipment (SITC 764) representing 18% and finally, to complete the

group, parts of electrical switch gear (SITC 773) weighting a 10%.

4

Standard International Trade Classification (SITC), is a classification of goods maintained by the United

Nations. 5 OECD: Organisation for Economic Co-operation and Development

Parts of motor vehicles and accesories

25%

Parts of office machinery19%

Parts of telecommunications equipment

18%

Parts of electrical switch gear10%

Parts of aircraf and helicopters5%

Parts of internal combustion engines

4%

Parts of engines and motors3%

Parts of lifting and loading machines

2%

Other14%

Share of 1995 OECD imports of parts and components

Source: Computed from United Nations COMTRADE database.

20

The total trade was measured in imports but those percentages are very similar in the case

of exports, sharing the same top-four group and with parts of motor vehicles and accessories

representing also a 25% of the total value of 441.548 USD million traded in parts and

components in 1995.

For the aim of this section of the work, that is to understand the relative importance of

different industries within the Fragmentation phenomena, we can consider that Yeats

studies, even if computed with 1995 data, are relevant to identify individual shares by each

category. This is also validated by a more recent study done by Nordas (2003), where

empirical evidence from studies of US multinationals find that the industries in which vertical

production networks are most common are transportation equipment (including motor

vehicles), machinery, electronics, metals and chemicals.

As we can see, the automotive industry has a very significant relative weight within the

global trade in components, being the first position in the ranking and accounting for a

quarter of the total in terms of value.

2.4 Effects of Fragmentation in Developing Countries

For developing countries there are significant potential gains from being part of a vertical

production network. The main benefits are technology transfer and access to market

networks for exporting. Developing economies typically have two major handicaps: they are

remote from the sources of leading-edge technology and distant from developed markets

and the interactions with users that are crucial for innovation (Saxenian, 2006). Firms in

peripheral locations can try to overcome these disadvantages through joint ventures,

technology licensing, and attracting foreign investment. The increasing mobility of high-

skilled workers and information, thanks to the fragmentation of production, provide

unprecedented opportunities for formerly peripheral economies to benefit from

decentralized growth based both, on entrepreneurship and localization of parts of

international corporations. As recently as in the 1970s, only large, established companies

could grow internationally, primarily by establishing marketing offices or factories overseas.

Today, the fragmentation of production and the falling costs of transport and

communication allow even small firms to build partnerships with foreign producers. Also the

specialization in specific parts of a process can give global presence to developing countries

that wouldn’t be able to be competitive in the international markets with the whole

production process.

International trade in components has become considerably important for some developing

countries (in particular Mexico and China) as they constitute 11 of the 30 largest markets for

these type of goods (Yeats, 2001).

21

But there are also some potential risks associated to fragmentation related with the

increasing interdependency of each Production Block. As different parts of the production

process are located in several countries, the risk formerly associated only with each single

country now becomes a risk for the whole production chain. The risks of single countries

might go from intrinsic industry related aspects, like union strikes, damaged core machines

in the production plants and transportation problems, to political and environmental

aspects. Due to the recent and very unfortunate earthquake and tsunami that took place in

Japan in 2011, a plant of the North American manufacturer GM had to be temporally shut as

it was not receiving enough parts from the Asian country (The New York Times, 2011).

Regarding a vertical specialization framework, there are different trade patterns identified

by Nordas (2003) in which developing countries play specific roles:

A “sequential” model, with ordered stages of production usually beginning with raw

materials in the first step, following stages adding value through further processing, and a

final stage of assembling and marketing the final product. It is often assumed that the first

stages are less capital and skills-intensive than the late stages. In that case the lower stages

would be produced in low-cost developing countries that are relative abundant in labor,

while intermediate stages would be located in middle-income countries with relatively low

costs, but reasonably well endowed with skills. The final stages would be produced in a

country relative abundant in skills, which also tends to be a relative rich country with a

significant market for the final goods. For example, in a sequential production network we

would expect that Mexico would import intermediate goods from China and other lower

cost countries, process the intermediates, and then export the output to the United States

for final processing or final consumption.

Another possible trade pattern is a "radial" production network with a coordinating firm

(e.g. a multinational company with headquarters in the US) typically owning a trademark.

This coordinating firm will provide the product design, engineering and some key inputs

developed under the firm’s specifications, both in-house or by third parties, either locally or

abroad. Then, production of intermediate components is spread through different suppliers

which can be located in several developing countries and may have lower tier

subcontractors in those or other countries. The components production is synchronized by

the coordinating firm, which may also be in charge of the assembly of those components and

market the final goods either at the local or international markets. In some cases, the role of

the coordinating firm will be limited only to the core activities such as R&D, design and

marketing. As an example of this radial pattern of vertical specialization, we would expect

that Mexico and China would import key intermediate products and services from the US

and Japan respectively and that the output is then exported back to the US or Japan.

Consequently, the trade between the supply networks of China and Mexico will be limited.

When analyzing the drivers of production sharing in developing countries, we should

consider four significant factors: Trade tariffs, Transportation costs, Labor costs and

Governmental Policies.

22

Trade tariffs

Fragmentation allows a finer division of labor between countries giving to each country the

chance to exploit its comparative advantage. Production sharing at international levels

means that a product or its components will cross national borders repeated times during

the production process, consequently, tariffs and other trade costs will have a multiplicative

effect on the total cost of producing the final product. If tariff rates are not sufficiently low,

international fragmentation will simply not take place.

Transportation costs

It is more likely to fragment and produce abroad goods with a high “value-density”, that is

high priced products relative to their bulk. Transportation costs are not always a linear

function with the distance variable, as other drivers should be considered, such as the

freight market itself (in terms of quantity of competitors, monopolies, etc) and insurance

policies. International freight and insurance charges represents around a 5 percent of the

value of all US imports (Yeats, 1989).

Labor costs

Marked differences between wage rates of developed and developing countries are one of

the major drivers of international production sharing. In Table 2.1 wages for different

countries in 2010 are shown, together with the international wage ranking for that

countries, the Purchasing Power Parity and the comparative ratio with United States wages.

Wages for countries like Russia, Mexico or Argentina are about 70% below those in the US.

By fragmenting its production in those countries US Companies can both improve their

profitability from domestic sales and also increase their ability to compete in third markets

due to reduction in its costs of production.

23

Table 2.1 – 2010 Purchasing Power and Wage Rates for selected countries

Governmental Policies

Own governmental policies of developing countries are even more important than Trade

Tariffs fixed by international organizations like OECD (Yeats, 2001). Industrial exporters often

receive special incentives by the government of less developed countries in the form of

credits, tax reductions, rent or other infrastructure, freedom from exchange controls, etc.

There are also very significant those internal measures taken by governments in order to

achieve better literacy rates, improve communications and transportation infrastructure.

Quality is also an each time more critical point as stated by Nordas (2003). A supply chain is

as strong as its weakest link, and one malfunctioning in any component may damage the

value of all other components. Quality cannot be substituted for quantity. Timeliness of

delivery becomes crucial also at the early stages of production. If expensive machinery and

high-skilled workers are made idle waiting for an input from suppliers performing an earlier

activity in the production chain, that would mean significant losses. That’s why, industries

with a large number of sequential tasks are willing to pay for quality and reliability. And

governmental policies can avoid disruptions such as strikes and political disturbances that

might affect this quality and reliability.

Ranking EconomyPurchasing Power

Parity (USD)

Wage Rate/hour

(USD)

Ratio with

US Wage

3 Norway 59,25 13,37 1,27

12 United States 46,79 10,56 1,00

20 Switzerland 39,21 8,85 0,84

21 Canada 38,71 8,74 0,83

27 UnitedKingdom 36,24 8,18 0,77

28 Germany 35,95 8,11 0,77

36 France 33,28 7,51 0,71

39 Italy 30,8 6,95 0,66

56 Portugal 22,33 5,04 0,48

73 RussianFederation 15,46 3,49 0,33

75 Mexico 14,34 3,24 0,31

76 Argentina 14 3,16 0,30

77 Malaysia 13,74 3,10 0,29

78 Turkey 13,42 3,03 0,29

95 Brazil 10,08 2,27 0,21

116 Ukraine 7,21 1,63 0,15

122 China 6,01 1,36 0,13

153 India 2,93 0,66 0,06

169 Nigeria 1,98 0,45 0,04

210 Congo 280 0,06 0,01

Source: SFGSA based on World Bank World Development Indicators Database, April 19, 2010

24

To conclude this section I will like to quote a reflection by Kierzkowski (2001) that says that

as a finer international division of labor emerges, new production niches can be found and

exploited. ‘A country or a firm need not to be a world producer of cars to benefit from the

growth of the automobile industry, it is enough to be competitive in the production of a

single part’.

25

3. The Automotive Industry In this chapter we will focus in the relevance of the automotive industry for the world

economy and later we will get deeper to understand how this complex industry (in terms of

the length of its supply chain) works now and which trends are appearing.

3.1 Relevance for the World Economy

The importance of the automotive industry in the world economy’s is significant because

many other manufacturing activities and service industries rely on the levels of motor

vehicle manufacturing and sales. These include input industries such as steel, fabricated

metals, chemicals, automotive electronics, and services sectors like automotive dealers, car

financing and auto repair shops. In addition, the cyclical behavior of motor vehicle output

and employment is critical for business cycle analysis and policy planning (U.S. Department

of Labor, 1999).

The automobile industry is the single largest industry in many developed and emerging

economies (Sasuga, 2008). The significant magnitude of the automotive industry is given also

by the quantity of people employed in it. As we can see in the following table, by 2004 more

than 8 million people were working in the world directly in the motor vehicles assembly and

parts industries. This is over five per cent of the world’s total manufacturing employment.

Additionally to these direct employees, if we consider people employed indirectly in related

manufacturing and services, more than 50 million people earn their living from cars, trucks

and buses (OICA, 2006). This means that each direct job in the auto and parts industry

induces 5 indirect jobs.

We can also see in Table 3.1 that there’s still a significant concentration in the direct

employment in auto parts as only 5 countries (China, USA, Germany, Russia and Japan)

gather almost a 60% of the global workers.

26

Table 3.1 – Direct employment in the automotive industry per country in 2004

Ranking Country

Direct employment in

the auto and parts

production

1 China 1.605.000

2 USA 954.210

3 Germany 773.217

4 Russia 755.000

5 Japan 725.000

6 Spain 330.000

7 France 304.000

8 Brazil 289.082

9 India 270.000

10 Korea 246.900

11 Turkey 230.736

12 UK 213.000

13 Italy 196.000

14 Thailand 182.300

15 Canada 159.000

16 Sweden 140.000

17 Mexico 137.000

18 South Africa 112.300

19 Czech Rep. 101.500

20 Poland 94.000

21 Egypt 73.200

22 Indonesia 64.000

23 Romania 59.000

24 Slovakia 57.376

25 Malaysia 47.000

26 Belgium 45.600

27 Australia 43.000

28 Hungary 40.800

29 Austria 32.000

30 Netherlands 24.500

31 Portugal 22.800

32 Switzerland 15.500

33 Serbia 14.454

34 Argentina 12.166

35 Slovenia 7.900

36 Finland 6.530

37 Denmark 6.300

38 Croatia 4.861

39 Greece 2.219

Total 8.397.451

Direct employment in the automotive industry

per country in 2004

Source: Organisation Internationale des Constructeurs

d'Automobiles, (www.oica.net)

27

In Table 3.2 we can see the production of cars and commercial vehicles in 2005. The total of

the world’s automotive industry made over 67 million vehicles that year in the cars and

commercial vehicles categories. This output level is equivalent to a global turnover of about

€1.9 trillion6. If vehicle manufacturing was a country it would be the sixth largest economy in

the world.

Table 3.2 – Automotive Industry production by country in 2005

6 1.889.840 € million (OICA, 2006)

Country Cars Commercial Vehicles Total

Percentage of

World

Production

United States 4.321.272 7.659.640 11.980.912 17,8%

Japan 9.016.735 1.782.924 10.799.659 16,1%

Germany 5.350.187 407.523 5.757.710 8,6%

China 3.078.153 2.629.535 5.707.688 8,5%

South Korea 3.357.094 342.256 3.699.350 5,5%

France 3.112.961 436.047 3.549.008 5,3%

Spain 2.098.168 654.332 2.752.500 4,1%

Canada 1.356.198 1.332.165 2.688.363 4,0%

Brazil 2.009.494 518.806 2.528.300 3,8%

United Kingdom 1.596.296 206.753 1.803.049 2,7%

Mexico 989.840 680.563 1.670.403 2,5%

India 1.264.000 362.755 1.626.755 2,4%

Russia 1.068.145 283.054 1.351.199 2,0%

Thailand 277.603 847.713 1.125.316 1,7%

Italy 725.528 312.824 1.038.352 1,5%

Belgium 895.788 33.177 928.965 1,4%

Turkey 453.663 425.429 879.092 1,3%

Iran 725.000 92.200 817.200 1,2%

Poland 540.000 85.443 625.443 0,9%

Czech Rep. 599.472 5.458 604.930 0,9%

Malaysia 405.000 158.837 563.837 0,8%

South Africa 324.875 200.396 525.271 0,8%

Indonesia 233.492 261.059 494.551 0,7%

Taiwan 323.819 122.526 446.345 0,7%

Australia 316.414 78.299 394.713 0,6%

Sweden 288.659 49.919 338.578 0,5%

Argentina 182.761 136.994 319.755 0,5%

Austria 230.505 22.689 253.194 0,4%

Portugal 137.602 81.533 219.135 0,3%

Slovakia 218.349 0 218.349 0,3%

Ukraine 196.722 19.037 215.759 0,3%

Romania 174.538 20.264 194.802 0,3%

Netherlands 115.121 65.627 180.748 0,3%

Slovenia 138.393 39.558 177.951 0,3%

Hungary 148.533 3.482 152.015 0,2%

Uzbekistan 87.512 8.302 95.814 0,1%

Egypt 48.034 21.189 69.223 0,1%

Finland 21.233 411 21.644 0,0%

Serbia 12.574 1.605 14.179 0,0%

Other countries 299.266 116.847 416.113 0,6%

Total 46.738.999 20.507.171 67.246.170 100,0%

Source: Organisation Internationale des Constructeurs d'Automobiles, (www.oica.net)

Automotive Industry Production in 2005

28

3.2 Trends in production and organization

Once shown the relevance of the automotive industry for the world economy, we will center

our focus in its trends. The most significant changes regarding the world production of

vehicles and its parts can be clustered in four directions:

There is a growing importance of Developing Countries both in consumption and

production of cars

The industry is moving towards an increasing concentration of players

The relationship between the assemblers and its providers is suffering important

changes

There is an increasing standardization of vehicle platforms for each producer

3.2.1 Growing importance of Developing Countries in Production and Sales

When we analyzed the four factors of production sharing in developing countries (Trade

tariffs, Transportation costs, Labor costs and Governmental Policies), we underlined that if

tariff rates are not sufficiently low, international fragmentation will simply not take place.

And that is what occurred in various developing countries between 1950s and 1990s, as they

used import substitution industrialization policies to promote the development of their local

auto industries. Those policies generated self-contained vehicle industries in Latin America,

India, China and the ASEAN region, characterized by limited imports of vehicles and

components and generally limited exports. In the 1990s, trade liberalization began to change

this situation: quantitative restrictions were gradually eliminated and tariffs reduced, Trade-

Related Investment Measures (TRIMs) like local content requirements and foreign exchange

balancing were also decreasing.

Consequently, as we can see in Table 3.3 and Figure 3.1, the production of vehicles in

developing countries almost doubled in the emerging markets during the 1990s. Sales in that

market followed a similar trend (Memedovic, 2003). Global production is usually higher in

the data than global sales, this is probably due to sales in countries for which data are not

available, and due to the counting of completely knocked-down kits7 (CKD) or semi-knocked-

7 complete knock-down (CKD), is a complete kit needed to assemble a product. In this case the fragmentation is between the total production on one hand, and just the final assembly on the other. CKD assembling plants are less expensive to install and maintain, because they do not need modern robotic equipment, and the workforce is usually less expensive than the home country. As specific equipment is not needed, CKD plants are effective and more flexible for low-volume production. With knock-down kits, firms in developing markets can gain expertise in a particular industry. At the same time, the CKD kit exporting company gains new markets. Companies sell knocked down kits to their foreign affiliates or licensees to avoid import taxes, to receive tax preferences for providing local manufacturing jobs, or to be considered as a bidder (i.e., in public quotations with buy-national conditions). By 2008 Chery, a chinese automaker, had already begun to build CKD assembly in Uruguay and Russia to establish its presence in those markets. (Fourin China Auto Weekly, March 2008).

29

down kits (SKD) as production in both country of origin and country of destination, again in

this case fragmentation might be itself causing an amplification effect because of double-

counting.

In order to have a more clear picture of the evolution of production and sales since 1990, we

clustered the world countries in three groups:

Triad Regions: composed by United States of America, Canada, Western Europe and

Japan

Fast-growing emerging markets: composed by the ASEAN countries, China, Eastern

Europe, India, Mexico and South America

Other markets: Russia, Africa and Oceania

In Triad regions, the automotive industry is characterized for being mature, with

overcapacity, cost pressures and low profitability. As showed in Table 3.4 and its graphic in

Figure 3.1, production in Triad regions rose by 4,2 per cent between 1990 and 1997, and

only by 3,8 per cent if we analyze the whole range 1990-2005, as production actually

decreased between 1997 and 2005. Regarding sales, from Table 3.4 we can see that they

were almost constant with a growth of only 0,6 per cent in the 1990-1997 period. In a recent

survey done by the consultancy company KPMG in 2010, 88 percent of the executives

belonging to the auto industry that were interviewed considered that there is overcapacity

in North America (only USA and Canada), on average they considered that the overcapacity

ranges an 25 percent. Around 80 percent of the executives believes that there is

overcapacity in Western Europe, and they quantified this in a 20 percent of non-needed

capacity. To complete the Triad regions, 75 of the interviewed consider that there is

overcapacity in Japan and that here the overcapacity level is around 15 percent, a bit lower

than in the previous two. It is important to underline that, to make this survey more

objective regarding the world financial crisis of 2008, these questions on overcapacity relate

to long-term capacity: companies were asked to rate levels of overcapacity over a whole

business cycle, and not just overcapacity in relation to the current year’s market.

This stagnation of production and sales in the Triad regions was contrasting with the growth

of the industry in the rest of the world, and a significant part of this rapid growth was

concentrated in a reduced number of developing countries. We named this condensed

group fast-growing emerging markets and includes Latin America, Eastern Europe, China,

India and the ASEAN countries. Between 1990 and 1997, they increased their vehicle

production by 93 per cent and sales by 80 per cent. If we consider the broader range 1990-

2005, production growth reaches a major 256,9 per cent, that significantly contributed to

the increase of the global production that was 33,4 per cent in the same range.

We can also notice that by 1990, the total production of our Fast-growing emerging markets

was similar to the other non-Triad markets, both barely below the 5 million units. Even if

both groups were growing, the rates were significantly different, so by 2005 the Fast-

growing cluster more than doubles the production of the Other markets group.

30

Table 3.3 – Production and Growth rate of motor vehicles by region between 1990, 1997 and 2005

Figure 3.1 – Production of motor vehicles by region in 1990, 1997 and 2005

So there is a new focus for car makers, as stated recently, in 2010, by a speech of the

General Secretary of the International Organization of Motor Vehicle Manufacturers (Van

der Straaten, 2010): ‘the so-called "traditional" markets are among the losers, and these are

precisely those where the focus has been for a very long time. New players have now

entered the field and this needs an adequate response. A "traditional" manufacturer, if you

allow me this term, concentrating all his efforts on his home market, is in my opinion

doomed to stagnation at best, or to failure at worst.’

This increasing opening to new markets might generate political and union frictions in their

home markets, in particular when new investments are realized abroad. Opportunities and

1990 1997 2005 1990 - 1997 1990 - 2005

Triad regionsa 40.759 42.490 42.312 4,2% 3,8%

Fast-growing emerging marketsb 4.922 9.505 17.565 93,1% 256,9%

Other markets 4.740 5.262 7.369 11,0% 55,5%

World Total 50.421 57.257 67.246 13,6% 33,4%

aUnited States of America, Canada, Western Europe and JapanbASEAN, China, Eastern Europe, India, Mexico and South America

Source: Computed from Fourin, Inc., Fourin’s Automotive Forecast (1998) and Organisation Internationale des

Constructeurs d'Automobiles, (www.oica.net)

RegionGrowth (percentage)

Production and Growth rate of motor vehicles by region, for 1990, 1997 and 2005

Production (thousands units)

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

80.000

1990 1997 2005

Pro

du

ctio

n (

tho

usa

nd

s u

nit

s)

Year

Production of motor vehicles by region in 1990, 1997 and 2005

Triad regions

Fast-growing emerging markets

Other markets

World Total

31

new markets generate new challenges that car producers should learn how to manage.

Recently a declaration by the CEO of Fiat Group, Sergio Marchionne when he said ‘Fiat would

do better if it could ditch Italy’ (Corriere della Sera, 2010), generated high-impact replies by

different political sectors and auto unions. According to Giorgio Airaudo, who is in charge of

one auto union in Italy, ‘even Marchionne’s predecessors were saying that thanks to

globalisation, the Italian factories were being paid for by profits from Brazil’. Four months

later and after a meeting with the Italian Government, Fiat executives confirmed a

significant investment in its home country (Corriere della Sera, 2011).

3.2.2 Increasing Concentration of players

Players in the auto industry are concentrated, with a reduced number of companies

accounting for a significant share of production and sales. Only 12 vehicle manufacturers

generated more than three quarters of the world total production in 2009, as we can see in

Table 3.4 and Figure 3.2.

Table 3.4 – World motor vehicle production by manufacturer

Manufacturer Production Share

TOYOTA 7.234.439 12,0%

G.M. 6.459.053 10,7%

VOLKSWAGEN 6.067.208 10,0%

FORD 4.685.394 7,7%

HYUNDAI 4.645.776 7,7%

PSA 3.042.311 5,0%

HONDA 3.012.637 5,0%

NISSAN 2.744.562 4,5%

FIAT 2.460.222 4,1%

SUZUKI 2.387.537 3,9%

RENAULT 2.296.009 3,8%

DAIMLER AG 1.447.953 2,4%

OTHERS 14.016.058 23,2%

World motor vehicle production by manufacturer in 2009

Source: Computed from Organisation Internationale des

Constructeurs d'Automobiles, (www.oica.net)

32

Figure 3.2 – Production Share of motor vehicles manufacturers

Figure 3.2 might even underestimate the degree of concentration as, generally, major

automotive groups have significant shareholdings in smaller vehicle producers, and over

time this has led to an increasing cooperation in vehicle development and production. An

example of this is Volkswagen Group, that holds 37% of Scania, 29% of MAN SE, 49% of

Porsche AG and 19% of Suzuki.

Recently this trend was emphasized, as giant automotive manufacturers have merged or

acquired other big companies. This is because of mainly two reasons: the intention of

gaining access to markets where they did not previously have a significant presence, and

simply to avoid bankruptcy after the contraction of the automobile market during the

financial crisis of 2009 (Turkcan, 2010). As an example of the first case, we can mention the

merger between the Renault Corporation (an European producer) and Nissan Motors (an

Asian producer): Renault holds 44.3% of Nissan shares, and Nissan holds 15% of (non-voting)

Renault shares. The alliance holds also 3.1% share of Daimler AG. In the second case, a more

broader agreement is the alliance that Chrysler has recently formed with Fiat (BBC News,

2009). With the signature, Chrysler benefits of the transfer of Fiat’s environmentally friendly

technologies, access to Fiat's distribution network in "key growth markets" outside the US,

and its global supplier base, instead, Fiat gets a 35% stake in the American company and

access to Chrysler's distribution network and suppliers in the US.

TOYOTA, 12,0%

G.M., 10,7%

VOLKSWAGEN, 10,0%

FORD, 7,7%

HYUNDAI, 7,7%

PSA, 5,0%

HONDA, 5,0%

NISSAN, 4,5%

FIAT, 4,1%

SUZUKI, 3,9%

RENAULT, 3,8%

DAIMLER AG, 2,4%

OTHERS, 23,2%

Production Share of motor vehicle manufacturers in 2009

33

3.2.3 The changing relationship between assemblers and suppliers

During the 1980s and 1990s, relationships between assemblers and suppliers changed

considerably, as a consequence of American and Western European firms attempts to match

the competitiveness of manufacturers from Japan and emulate their production and supplier

strategies. The challenge in this increasing competition environment, has been how to

reduce costs and maintain sales, while preserving vehicle reliability. Vehicle manufacturers

reduced their in-house production levels and began to transfer design functions to their

leading suppliers.

Traditionally, assemblers relied on their in-house parts divisions to supply components, and

these divisions usually did not have to compete with outside suppliers. However, since late

1980s, motor vehicles assemblers began to require their divisions to compete with outside

suppliers. This put great pressure on in-house suppliers to improve efficiency and lower

costs. Similarly, outside suppliers also had to improve efficiency and reduce costs, in order to

compete with larger in-house suppliers for contract bidding (U.S. Department of Labor,

1999).

Regarding the relationship between suppliers and assemblers, three are the most significant

changes (Memedovic, 2003):

Design activities are transferred from assemblers to suppliers. Instead of providing

ready-designed parts (a ‘catalogue’ product) for different assembling companies,

suppliers moved towards a greater customization, adapting their products to the

needs of each specific car-maker. So, suppliers started to offer their own design

solution and the assemblers role was limited to providing the overall performance

specifications and information about the interface with the rest of the car. The

expansion of supplier’s responsibility in design and product development resulted

more common components between platforms of the same car-maker, reducing time

needed to develop new products.

There is an increasing flow of entire sub-assemblies (or modules) rather than

individual components. Here I can mention, from my working experience, the Visteon

example that we have seen when analyzing the transaction costs, but now from a

different perspective. Visteon (or any other direct supplier) becomes responsible for

providing the whole heating system instead of its single components like fans,

electrical resistances and regulators. So to do that, an additional assembly line at the

supplier’s facilities (in this case Visteon) is needed, but on the other hand there is no

further operation required once the ready-to-assemble module arrives at Ford’s (or

any other assembler) plant. In the past, an assembler might design a seat, make

detailed drawings of 20-30 separate elements, find suppliers for each, take in the

parts and assemble them into seats in-house. Now, the assemblers look for firms that

will design and supply ‘black-box’ parts, in this case the whole seating system,

34

including headrest, seat belts and pretensioners. Additionally, suppliers’ workers

earn substantially less than what major motor vehicle manufacturers’ employees

earn, resulting in lower labor costs (U.S. Department of Labor, 1999). Modules

assembly from suppliers has become part of the increasing fragmentation of

activities in the automotive industry.

Assemblers become more involved in the specification of the production and quality

systems of their suppliers. With the imposition of zero-defect quality requirements

and the increasing importance of just in time operations, even simple tasks became

more critical for the efficiency of the production system as a whole (assembler +

suppliers). As assemblers had to invest in auditing and coordination with its suppliers

to achieve high quality standards, relationships turned into longer-term but with a

more reduced group of suppliers. Most of the assemblers organize an yearly price for

suppliers quality standard achievement8.

All this changes in the relationship between assemblers and suppliers resulted in a new

structure of the automotive industry, that is broadly accepted both in the literature and

inside the industry. It consists in four levels: assemblers on the top followed by three ‘tiers’

of suppliers as we can see in Figure 3.3 below. It worth to notice that the term ‘tier’

describes products rather than an entire firm, so that some firms may be tier 1 on one

product and tier 2 on another.

Figure 3.3 – Actual organization of the Automotive Industry

8 Such as Ford Q1 Quality System Award (Ford South Africa, 2009)

Assemblers

First-tier suppliers

Second-tier suppliers

Third-tier suppliers

Organization of the Automotive Industry

1 (Fiat)

300

14.000

Source: Computed from Follis (2002)

35

In Figure 3.3 we can also see the relative quantity of suppliers per tier in the case of Fiat

auto-maker. By 1994 Fiat first-tier suppliers were about 300, and about 14.000 firms were

acting as their suppliers in the second tier. Regarding the Third tier firms, as they are more

expanded in their activities, data of its quantity is not certain, and in the literature the Third

tier is often merged with the second-one. As firms operating at the second tier of the chain

often serve several first-tier suppliers, the effective ratio of second to first tier suppliers is

much greater than what Figure 3.3 would suggest. According a large component

manufacturer estimation, each first-tier supplier in Europe deals with an average of 100

second-tier suppliers (Follis, 2002).

Assemblers: Require increasing economies of scale to spread costs of vehicle design and

branding. The core competences are innovation and design. Assemblers have strong

bargaining power with its suppliers as exemplified by Kesseler (1996): ‘In one case, the

supplier was coerced into making a major change in product design and technology, even

though the design originally supplied met the contract specifications. In the second case, the

customer imposed a price reduction and a sharing of the contract with a competing supplier

some time after the original contract had been signed.’ Cooperation does not preclude the

exercise of power.

First-tier suppliers: These firms supply directly to the assemblers. Tier 1 suppliers have been

required to increase their role in the design, research and development of modules and

systems as they use their own technology to meet the performance and interface

requirements set by assemblers. First-tier suppliers are consolidating their operations

worldwide, since they need to have the financial and managerial resources to comply with

specific requirements from the motor vehicle manufacturers and to follow their customers

to various locations around the world. Tier 1 suppliers form their own strategic partnerships

with lower tier suppliers, as well as managing the sourcing of auto-parts from tier 2 and tier

3 suppliers. Investment in new production systems and training of its employees is a usual

practice as First-tier suppliers need to be aligned with the production and quality system of

the assemblers (Humphrey, 1999).

Second-tier suppliers: These firms will often work based on designs provided by assemblers

or First-tier suppliers. They require process-engineering skills in order to meet cost and

flexibility requirements. To remain competitive in the market, it is a key issue for this tier 2

suppliers the ability to meet quality requirements and obtain quality certification such as ISO

90009 and QS 900010. These firms may supply just one local market, but there is an

increasing tendency towards internationalization.

9 The ISO 9000 family of standards represents an international consensus on good quality management

practices. It consists of standards and guidelines relating to quality management systems. (International Organization for Standardization, 2011) 10

QS-9000 is the name given to the Quality System Requirements of the automotive industry which were developed by Chrysler, Ford, General Motors and major truck manufacturers and issued in 1994. (Reed, 1997)

36

Third-tier suppliers: These firms supply basic products and at this point in the chain, firms

compete predominantly on price. In most cases, only basic engineering skills are required. A

study performed by Leite (1997) of skills and training at different parts of the automotive

value chain in Brazil showed that in third-tier suppliers, skill levels and investments in

training were limited.

Some authors consider an additional level in between assemblers and first-tier suppliers

called Tier 0,5. They use this terminology as some suppliers are closer to the assemblers and

have even more global presence than other First-tier suppliers. For this thesis we will

consider the assemblers and three tier supplier chain structure, and Tier 0,5 suppliers would

be considered as part of the First-tier.

A study from the United Stated Department of Labor (1999) based on SICs 3711 (Motor

vehicle assembly), 3714 (Motor vehicle parts) and 3465 (Automotive stampings) show the

increasing importance of the role of suppliers in the automotive industry. As we can see in

Figure 3.4, in the United States, by 1979, the motor vehicle parts and assembly industries

were comparable in terms of employment: 441.100 in parts and 463.000 in assembly. The

number of employees in the parts industry has grown in every year except two, while the

number of employees in the assembly industry has increased in 8 of 16 years. What is a clear

indicator of the growing importance of suppliers is that from 1987 forward, there have been

more workers in parts than in assembly. By 1998, there were 546.800 workers in the parts

industry, and 341.800 in the assembly industry. In the automotive stampings, a third

industry related with the automotive industry, employment in 1998 was little changed from

1979. There were 117,600 workers in automotive stampings in 1979, and 114.100 in 1998.

We can consider that about two thirds of the workers are employed in the components

industry (parts and stamping) while one third is employed by assembling companies, as

confirmed by a more recent study performed in 2005 from the Geneva-based International

Labour Office (ILO, 2005).

37

Figure 3.4 – Employment in motor vehicle assembly and supplier industries in the US between 1979-1998

3.2.4 An increasing standardization of platforms and models

Assemblers are standardizing platforms and models across their different divisions. Fiat

Group share components within its Fiat, Lancia and Alfa Romeo brands (and even with

Chrysler for incoming models), VW Group does the same with VW, Seat, Audi and Skoda,

PSA with Peugeot and Citroen, and new alliances will result in more common platforms (like

Renault and Nissan). Companies follow this strategy to reduce development costs, obtain

economies of scale and facilitate a more flexible allocation of production in different regions.

This means that developing countries are increasingly considered less as isolated national

markets and more as potential parts of a global production system. This represents a

significant rupture of previous strategy. Auto companies had previously kept developing

countries out of phase with their core markets, producing models which were specifically

developed for local markets (for example, the bestsellers VW Brasilia and Ford Corcel models

in Brazil in the 1970s), or produced models considerable time after they had been replaced

in Europe and North America. Due to the increasing competition in emerging markets, the

assemblers updated their model offer. Consumers in developing markets can now buy

models that are similar to those sold elsewhere or they are produced under the same

platform, or, at least, the delay between the launch of a new model in the Triad regions and

the availability in the emerging markets is not that long.

0

100.000

200.000

300.000

400.000

500.000

600.000

1979

1980

1981

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Qua

ntit

ty o

f em

ploy

ees

Year

Employment in motor vehicle assembly and supplier industries in the US

Motor vehicle assembly

Motor vehicle parts

Automotive stampings

38

3.3 A Global Automotive production System

In the global automobile market, the competitive position of an individual manufacturer no

longer depends exclusively on traditional factors like productivity or innovative capacity.

Instead, the competitive position is also a function of the design of the international value

chain. A central issue, therefore, is how value activities should be distributed geographically

to enable a company to compete with its rivals (Schmid, 2008).

3.3.1 Follow Sourcing

We have analyzed four main trends in the actual automotive industry finding firstly a

growing importance of Developing Countries after the liberalization of its vehicle markets

that resulted in growth in sales and production, secondly, an increasing concentration of

players that are getting more global as occidental, oriental and european companies are

gathering together forming huge automotive groups, thirdly a much more intimate

relationship between assemblers and suppliers with more duties assigned to the latter and a

complex production chain with several tiers and some of them getting more global and,

finally, we noticed an increasing standardization of platforms and models that favors

international trade.

These four trends resulted in the integration of developing countries into the global auto

production system, both by the allocation of assembly plants in emerging markets and the

emergence of global suppliers who design and produce component systems at multiple

locations around the world. In the following Tables 3.5 and 3.6 we can see a picture of the

situation of the quantity and location of assembly plants owned by the top ten automotive

companies in 11 major developing countries in early and late 1990’s. At the beginning of the

1990s, the ten largest vehicle assemblers had 28 light-vehicle assembly plants in the leading

emerging markets. The North American and European manufacturers were strong in Latin

America, while most Japanese-owned plants were in Southeast Asia. There were few plants

owned by the leading global companies in Eastern Europe, and none in India. As a result of

extensive foreign direct investments (FDIs) in the developing countries in response to the

dynamism of these markets, the situation had changed dramatically by the late 1990s. In

Table 9 we can see that the number of assembly plants has risen to 62, more than double of

the original 28 plants.

39

Table 3.5 – Quantity of light vehicle assembly plants in developing countries in the early 1990s

Table 3.6 – Quantity of light vehicle assembly plants in developing countries in the late 1990s

It is important to underline that due to the increasing relationship of assemblers and

suppliers and the standardization of model platforms, car makers prefer to use the same

suppliers in many different locations. This strategy is known as ‘follow sourcing’, because the

supplier “follows” the assembler to new locations, in our case, to the emerging markets.

Interviews with both assemblers and suppliers in Brazil and India show clearly that the

assemblers’ first preference was for a follow source, located close to their plant and

providing a cost competitive product (Humphrey, 1999). For an assembler starting up

production in a new market, the best option is to use the same supplier as in the home

location. Doing this, the component should be identical to that used in other production

locations. In addition, the first-tier supplier is responsible for guaranteeing that the rest of

the supply chain meets the assembler’s quality standards. Instead of dealing with a large

Source: United Nations Industrial Development Organization (UNIDO) - 2003

Quantity of light vehicle assembly plants in developing countries in early 1990s

Source: United Nations Industrial Development Organization (UNIDO) - 2003

Quantity of light vehicle assembly plants in developing countries in late 1990s

40

number of local suppliers whose designs have to be tested and approved, the assembler

interacts with only a limited number of follow sources providing sub-assemblies. A least

preferred option is for assemblers to choose a local company to produce the part, either

under license or using its own design. In this case, the assembler has much more work to do

in controlling the production processes of the local supplier and its quality systems.

Most first-tier suppliers increased their global presence through a mixture of acquisitions

and FDI. As an example, we can see in Table 3.7 and Figure 3.5 the global expansion of Valeo

a French first-tier supplier that produces a wide range of integrated modules like powertrain

systems, thermal systems, comfort and driving assistance systems, and visibility systems.

Table 3.7 – Valeo’s expansion of production sites between 1986 and 1997

Before the expansion in 1986, more than a half of Valeo’s factories were in France and a

further 30 per cent were within european borders. By 1997, the company had increased its

coverage in Europe, acquired 26 new plants in the Americas, increasing six-times the

quantity of plants in South America, and the installation of 10 production sites in Asia. By

1997, only one-quarter of its plants were in France. By 2010, the company continued its

expansion in Asia, reaching a total of 30 production sites (Valeo, 2011).

Figure 3.5 – Valeo’s expansion of production sites between 1986 and 1997

1986 1997

France 21 27 29%

Europe, excluding France 12 34 183%

Asia 0 10 -

North America 4 12 200%

South America 3 21 600%

Total 40 104 160%

Source: Valeo, GERPISA auto industry colloquium, Paris, June 1998.

Growth

ratio

Number of plants

Valeo expansion of production sites 1986-1997

Location

0

5

10

15

20

25

30

35

40

France Europe, excluding

France

Asia North America South America

Pro

du

ctio

n s

ite

s

Region

Valeo’s global expansion 1986-1997

1986

1997

41

One important aspect that favors follow sourcing is the standardization of production

processes between different plants of assemblers around the world. It means that choosing

a similar way of producing vehicles results in not only using the same components in

different parts of the world, but also the same type of coordination and management of

suppliers. According to Ralf Kalmbach (2008)11, a German automotive consultant, different

producers still have to work towards the standardization of processes: ‘an important aspect

of global management is to introduce production systems worldwide, so that it is not

necessary for every plant to reinvent them. If you visit one of Toyota’s plants today,

anywhere in the world, you will find the same processes. General Motors and Volkswagen

have a long way to go to reach the same level of standardization. The processes in a VW

plant in Brazil are quite different from what you will find in China or at Volkswagen’s main

production facility in Wolfsburg. Both General Motors and Volkswagen will have to make

substantial changes in order to catch up with Toyota in terms of company-wide

coordination. They will need to make great strides in standardizing their production systems

and the relevant technologies. Uniform structures are crucial for global coordination, and

this requires, among other things, identical management principles worldwide. Every Toyota

plant uses approximately 20 key performance indicators (KPI), and they are the same

whether the plant is located in Toyota City or elsewhere. Thus a Toyota manager who moves

from one plant to another will immediately be able to get his bearings. In contrast, if you are

transferred from VW’s main production facility in Wolfsburg to a plant in Brazil, it will take

you three months (assuming you are a quick learner) to begin to understand how the plant

functions. It is hard enough for an automobile manufacturer to adjust to country-specific

conditions; it is important not to allow differences between plants to complicate matters

further.’

3.3.2 Centralization and Decentralization of international value chain

As a consequence of follow sourcing, we argued that assemblers would like to have the

same parts, technologies, quality systems and coordination mechanisms wherever their

production sites are located. In a fully globalized auto industry, there might be a case for

centralizing component production at a limited number of sites. For more complex and

technologically advanced components, this tendency is particularly strong (Memedovic,

2003). Engines and gearboxes are produced not only at limited numbers of locations within

regions and shipped to larger numbers of assembly plants, but they are also shipped outside

regions. As an example, in a following chapter of this Thesis, we will analyze in dept the case

of a Volkswagen plant located in Cordoba, Argentina, which produces gearboxes for

different models assembled worldwide, and that exports 95 percent of its production. In the

same way, there is a trend towards centralization of production sites for electronic

11 Ralf Kalmbach is Partner and Head of Automotive at Roland Berger Strategy Consultants.

42

components. However, transportation costs and, above all, protectionism make local or

regional production often unavoidable.

So companies need to manage the centralization or decentralization of their international

value chains to their best advantage. From a managerial point of view, Schmid (2008)

considers three basic types of configuration strategies that we can see in Figure 3.6.

Figure 3.6 – Centralization – Decentralization configuration strategies

In the first case, under a centralization strategy (which is only possible by exporting indirectly

and using domestic trade intermediaries) all of the company’s value activities remain in the

home country. Secondly, a combined strategy means that some activities are carried out

centrally while others are dispersed. Finally, a company that follows a strategy of strict

decentralization implements all activities that are part of the value chain in every country,

which may imply miniature replicas in the host countries.

It’s worth mention that, in Figure 3.6, Schmid considers four value adding activities based on

Michael Porter’s Value Chain. Regarding the aim of this thesis we should underline that the

schema is a broad outlook of the whole automotive value chain and that within single

activities, like production, for example, fragmentation can be present and this value

functions are not carried out entirely in one single country. Each country or location can

handle different sub-processes. In a very aggregated way, the production process of an

automobile can be broken down, for example, into the stamping of sheet metal

components, body construction, painting of the vehicle body, production of components and

final vehicle assembly, as we can see in Figure 3.7.

Centralization – Decentralization configuration strategies

43

Figure 3.7 –Automobile Production process

For each specific activity companies determine on a case-by-case basis whether

concentration or dispersal is preferable. As stated by Humphrey (1999) ‘when Ford began to

produce identical vehicles at different locations in Europe in the 1970s, it combined central

production of certain high-value products (engines, gearboxes, etc.) with local supply

networks for each plant’. The main drivers which affect decisions from a managerial point of

view of Centralization or Decentralization strategies are the following (Schmid, 2008):

Centralization Strategy Drivers:

To take advantage of economies of scale and learning effects

Simplified organization, no processes involve more than one country

Simplified management, face-to-face contact is possible

To facilitate coordination of value activities, as little or no distance exists

Easier access to information and communication, among other things, because

cultural and language barriers are not a factor

Projects can be completed more quickly, as there is less need for coordination

Prevents duplication of effort, as, in most cases, more relevant information is

available on site than in other corporate units

Easier to maintain confidentiality because information remains within one site

Transfer of information within the company is easier because it does not involve

crossing borders

Possible to establish a largely uniform culture

To avoid conflicts between employees at different sites

Simplified schema of an Automobile Production process

44

Decentralization Strategy Drivers:

Access to scarce production factors, like qualified personnel

To take advantage of comparative cost advantages with respect to production factors

To distribute risk and increase flexibility and innovative capacity, for example by

duplicating or multiplying activities

To make use of complementary resources, competencies and skills

Better coordination with activities that have already been carried out on site

To avoid legal restrictions, for example, regulatory requirements or import

restrictions

To ensure market access and comply with government regulations, for example local-

content requirements

To take advantage of direct or indirect support provided by the government of a host

country

Greater acceptance of the company within the host country, for example, by

establishing itself as a local manufacturer

To open up markets that offer little competition

To overcome logistic barriers, for example to reduce transport costs

Better adaptation of products or services to the needs of local customers

To take advantage of cultural proximity, for example, to supply or sales markets

To set up outposts in strategically relevant markets, particularly in innovative clusters

or in the home markets of important competitors

To gain access into local information and communication networks

Proximity to scientific facilities, which facilitates access to knowledge and expertise

Acquisition of international experience by going abroad

We can divide the automotive value chain in three main functions:

1. Research and Development (R&D)

2. Production

3. Sales and Aftersales

The aim of this Thesis is to focus on the productive aspects, however as they are related with

the other two functions, we will briefly mention how centralized R&D and sales and after-

sales are.

R&D functions are distinguished in the literature as research, that focuses on gaining new

insights, and development, which puts those insights into practice in new products or

processes. Market observation activities are often integrated into the R&D organization and

they are generally found in strategically important locations. All of this activities remain

highly centralized in the home countries of the companies, high degrees of concentration of

activities are required because of the necessity to build new, efficient and effective

45

development capabilities. Factors that favors this centralization are the presence of

economies of scope and scale, the nature of creative activities requiring personal

interactions and the need for keeping corporate strategies and product development

activities as opaque to competitors (Miller, 1992).

Research carried out by the Volkswagen Group has always been largely centralized, with the

corporate research division at the company’s Wolfsburg headquarters providing support for

all of the Volkswagen brands. The rest of R&D’s sites for Volkswagen are mainly located in

the Triad region (three in Germany, four in the rest of Western Europe, one in the US and

one in Japan), with the exception of two sites in Eastern Europe and one in China. Toyota’s

R&D’s activities are even more centralized than those of the Volkswagen Group as research

is conducted in Nagakute, Japan, for the entire Toyota Group. Toyota’s R&D sites are also

mainly located on the Triad region (four sites in Japan, three in Western Europe and five in

the US), the only exceptions are one site in Thailand and one in Australia (Schmid, 2008). So,

even when in the industry they refer to the globalization of R&D activities in the automotive

sector, they analyze the coordination mechanisms between R&D sites located within the

Triad region (Mayer, 2001).

Regarding sales and after-sales, those functions are typically decentralized as they need to

be close to the customers. Those are usually the first functions that are located in a new

market, even in the case of just exporting vehicles to that country without installing any

production facility. The sales organization and distribution network of a car manufacturer

have a divergent structure, which comprises several stages like the central sales department

of the manufacturer, sales persons responsible for different world regions, sales companies

in different countries or local areas, and a rather high number of further retailers and sales

subsidiaries (Meyr, 2004). As a personal example, I can mention that while working in the

Argentinean branch of BMW, about 50 people were in charge of all the local activities,

distributed in sales and marketing, after-sales, and finance divisions.

3.3.3 Global supply networks

As a consequence of follow sourcing and decentralization strategies, global supply networks

are becoming increasingly important in the auto industry. Assemblers and suppliers develop

parallel networks worldwide. This networks are represented in the following Figures 13 and

14, which present a comparison model between automotive production during the 1960s

and how relationships changed after 1990s when follow sourcing was extensively applied

(Humphrey 1999). For simplicity, this shows just a single supplier to one assembler operating

in three different countries: the country of the assembler’s core operations, and operations

in two other locations.

Figure 3.8 shows how the design function of components evolved. In the 1960s, the

assembler was responsible for designing a large part of the car, providing detailed drawings

46

to suppliers in the different locations via its subsidiaries. In the global sourcing model, the

component manufacturer in the core location plays a much more important role. It designs

the part or system together with the assembler (indicated with a double-headed arrow in

the figure). In many cases, the design belongs to the supplier, and it becomes responsible for

transferring its design to a partner (subsidiary, affiliate or licensee) in other locations.

Consequently, inclusion in the global supply network becomes critical for survival as a first-

tier supplier. Without this, it cannot obtain neither designs nor new contracts.

Figure 3.8 – Design function in Global Supply Networks

In Figure 3.9 we can see the representation of the flow of materials. In the 1960s, in each

location the assembler is supplied locally. For the 1990s, flows of materials are similar. The

centralization of design does not exclude decentralized production, but flows of components

between countries are likely to be more common.

Figure 3.9 – Flow of Materials in Global Supply Networks

An example of integration of a new production site into a Global Supply Network can be

given by the case of Mercedes Class A in Brazil (Humphrey, 1999). Some key parts for the

car like engine, gearbox, ABS sensors and rear axles are supplied from Germany, or from

Information about Design

Flow of Materials

47

Mercedes itself in Brazil. For the remaining components, Mercedes’ overall policy is to follow

source. The company estimates to develop a network of approximately 80 main suppliers,

and 50 smaller suppliers. This is a relatively small supplier base considering that, for example

VW had in Brazil has network of about 500 suppliers in 1997. Of the main suppliers in

Europe, 70 per cent already had operations in Brazil, and Mercedes was encouraging

suppliers not located in Brazil to start operations there. Supplier selection process in Brazil

was strongly influenced by Mercedes’ headquarters in Germany. However, in Table 3.8 we

can see that follow sourcing is not absolute. Even components such as brakes and

instrument panels, which have supplier design content, are being supplied by companies

that do not supply in Germany. If another company can guarantee quality requirements and

delivery conditions and also be more competitive on price, then they have chance of winning

the contract. Costs are a particularly important factor in the industry, and suppliers already

established in the country would have a broader customer base over which to distribute

fixed costs and achieve economies of scale. The use of non-follow sources does not

necessarily create opportunities for local companies. As we can see in the table, in most

cases the alternative to the follow source was another transnational company.

Table 3.8 Mercedes Class A Sourcing in Brazil in 1997

Another example of integration into a Global Supply Network, but in this case from a

different perspective, can be given with the production of Dacia’s Logan model in Mioveni,

Romania (Schmid, 2008). In this case, the model represents a low-cost car and the

production site of Romania is the main production site in terms of capacity and

Supplied by a Company already

supplying in Germany

Supplied by Other Transnational

Company

Supplied by Locally-owned

Company

engine mounting seats petrol tank

external plastic parts exhaust taillghts

wiring harness instrument panel aluminium wheels

wheel and tyre assembly starter motor plastic parts sets

windscreen/glass headlights

heating/cooling system torsion bars

dashboard springs

shock absorbers wheels

distributor plastic parts

clutch steering system

electrical components brakes

mirrors

air bags

trim

relays

ABS sensors

rear axles

Source: Humphrey (1999) from Zilbovicius and Arbix (1997)

Mercedes Class A Sourcing in Brazil in 1997

48

concentration of production processes, in contrast, the Mercedes Class A model is a

premium brand car produced in Germany and Brazil, concentrating most of the activities in

the European site. In the case of the Logan, the Mioveni plant and all of the other seven

production plants are located in non-Triad countries. Locations of Logan plants outside

Romania (in Russia, Iran, India, South-Africa, Brasil, Colombia and Morocco) and are mainly

just assembling CKD12 kits. Dacia is part of the Renault-Nissan automotive group, and the

Logan model and its brother Sandero are sold in some markets under the Renault or Nissan

brand. The objective was to produce a low-cost car, and in the automotive industry,

procurement costs account for an average of 60 percent of total vehicle manufacturing

costs. Consequently, Renault has been seeking to reduce the costs of purchasing

components for the Logan and Sandero. Its success in doing so is due largely to the fact that

procurement at the Dacia plants is highly localized. As we can see in Figure 3.10, about 80

percent of procurement value, is localized in Romania. Although CKD assembly takes place

worldwide, production is mostly centralized in Mioveni, and Renault is able to take

advantage of Romania’s low labor, raw material and technology costs globally. Indeed, 50

percent of the materials for manufacturing the Logan are obtained in the Pitesti industrial

park that is located in the immediate vicinity of the Dacia plants. By comparison, the

localization level of the premium manufacturer BMW for its plant of South Carolina, in the

US, was only 30 percent in 2007 (while most of its parts are still coming from Europe).

Figure 3.10 – Value of procurement per source for Dacia Logan in 2008

In Figure 3.11 we can see, that the concentration of procurement in the Romanian region is

also reflected in supplier numbers: Of the 188 suppliers that provide components for Logan

production in Mioveni, 54 produce those parts in Romania and another five in the

surrounding Central and Eastern European countries. Nine suppliers for the Dacia plants

operate from Turkey and 10 from Western Europe. The remaining 110 companies are

12

complete knock-down (CKD), see note 7

Pietisti Industrial

Park

(Romania)50%

Rest of Romania30%

Other countries

20%

Value of procurement for Dacia Logan in 2008

80% of procurement value is localized in Romania

Source: Schmid (2008) based on Roland Berger (2008)

49

located elsewhere in the world, and its share in value of the total procured goods is

significantly lower than for the other areas. Suppliers are mix of Romanian companies like

Euro Auto Plastic Systems (Euro APS) and foreign companies like the French Valeo and the

American Johnson Controls.

Figure 3.11 – Number of Suppliers per source for Dacia Logan in 2008

In contrast with Humphrey (1999), Ralf Kalmbach (2008) do believes that a local supplier can

become a global supplier (at least in the long term). When he was asked during an interview

if over the long term, local suppliers for low-cost cars from emerging markets will become

international companies, he replied ‘Yes, absolutely. The major automotive companies are

building a bridge for local suppliers, so to speak. Their purchasing departments have set

certain internal targets for procurement from the so-called low-cost countries, ranging

between 20 and 30 percent of total volume. At present, however, none of these

manufacturers have been able to meet these targets. But if a local supplier, for example in

Russia or India, is qualified and has produced good results, a purchasing department will

consider using it as a supplier for the company as a whole. Of course, this only applies to

certain parts. No one is going to transport a painted bumper from India to Europe, but

shipping certain forged parts might make sense. Manufacturers’ purchasing departments

will make sure that local suppliers become serious competitors in all of the core markets

relatively quickly. Furthermore, these suppliers (for example Indian small and medium-sized

businesses) are already showing the necessary entrepreneurial commitment to expand

internationally.’

110

48

14

10

6

Rest of the World

Rest of Romania

Rest of Central/Eastern Europe

Western Europe

Pitesti Industrial Park (Romania)

Number of Suppliers per source for Dacia Logan 2008

110

48

14

10

6

Rest of the World

Rest of Romania

Rest of Central/Eastern Europe

Western Europe

Pitesti Industrial Park (Romania)

Number of Suppliers per source for Dacia Logan 2008

110

48

14

10

6

Rest of the World

Rest of Romania

Rest of Central/Eastern Europe

Western Europe

Pitesti Industrial Park (Romania)

Number of Suppliers per source for Dacia Logan 2008

110

48

14

10

6

Rest of the World

Rest of Romania

Rest of Central/Eastern Europe

Western Europe

Pitesti Industrial Park (Romania)

Number of Suppliers per source for Dacia Logan 2008

110

48

14

10

6

Rest of the World

Rest of Romania

Rest of Central/Eastern Europe

Western Europe

Pitesti Industrial Park (Romania)

Number of Suppliers per source for Dacia Logan 2008

110

48

14

10

6

Rest of the World

Rest of Romania

Rest of Central/Eastern Europe

Western Europe

Pitesti Industrial Park (Romania)

Number of Suppliers per source for Dacia Logan 2008

Source: Schmid (2008) based on Roland Berger (2008)

50

3.4 Regional Production Networks

Integration of different countries in a broader production network often occurs at a regional

level. According to Humphrey (1999), the emerging markets can be classified in two groups

regarding the way they are integrated into regional production networks.

The first group consists in countries on the periphery of the industrially advanced Triad

countries that are being incorporated into their productive structures. Within this group we

can find the clear example of Mexico, which is being increasingly integrated into the North

American auto production system, and also Eastern Europe integration to Western Europe

productive network. A similar process occurs with the division of labour between ASEAN

countries and Japan, involving two-way flows of vehicles and components. The second group

of emerging markets are those which are constituted primarily as independent production

and consumption spaces. This group includes India, China and Mercosur. In these countries,

regional production is oriented predominantly towards the domestic market.

Regarding the first group, the process of regional integration started in the 1960s in North

America and in the 1970s in Europe. In the first case thanks to the free flow of vehicles and

components between the United States and Canada. In Europe, GM and Ford began to

integrate their operations in the 1970s. Production systems were defined at a regional level

in both continents. Vehicles and components were designed and produced for the region as

a whole, and single plants became responsible for the whole region's production of high-

volume items such as engines and gearboxes (Memedovic, 2003).

3.4.1 The North American production system

During the 1980s, the protected Mexican automobile industry was not linked to the rest of

the North American market. Mexico exported less than a 4 percent of its total vehicle

production, and 98 percent of these vehicles were exported to Latin America and Western

Europe. After 1990, Mexico became increasingly integrated into the North American

production system, exporting more almost the third part of its total production to USA and

Canada. The NAFTA Agreement created the basis for this deeper integration. The agreement

reduced tariffs on vehicles and components imported into Mexico, and allowed companies

exporting from it to import products on favorable conditions. This promoted a division of

labour between plants in Mexico and those in the United States and Canada. Mexico has

proved an attractive location for vehicle assembly and labour-intensive components

production.

51

3.4.2 The European production system

Eastern European automotive industries were transformed and integrated into West

European production systems, creating a regional production system. In the early 1990s,

following the collapse of their political and trading systems, governments in Central Europe

looked to the European Union for Foreign Direct Investments and for their long-term

political future. FDI were a way of restructuring state-owned industries. By 1995, the three

main car producers in the region, Skoda in the former Czech Republic, and FSM and FSO in

Poland, had been sold to foreign buyers. In 2008, this region called Centrope (that includes

Slovakia, Czech Republic, Hungary, Austria, Romania and Poland) produced more than 3

million cars that rolled off its assembly lines. Approximately 5 percent of the vehicle

production worldwide is manufactured in this region that’s why it is called "Detroit of the

East" (AC Centrope, 2010).

Integration between the motor industries of Western and Central Europe has taken two

forms. First, there was an increasing two-way trade in vehicles. Central Europe offered both

growing domestic markets and low-cost production sites to Western European assemblers

(including firms from Japan and North America with operations in Western Europe). As an

example, the iconic Italian model from Fiat, the 500 ‘Cinquecento’ is only produced in

Poland. And a shared factory of PSA Group and Toyota called TPCA in Kolin, Czech Republic,

produces the Citroen C1, Peugeot 107 and Toyota Aygo that are sold in the whole Europe

(PSA, 2005).

The second form was due to the fragmentation of the production process into a number of

export-oriented engine and component plants. During the 1990s, those new productions

sites were built in Eastern Europe by Western European automakers. As an example we can

mention the engine assembly plants that Audi and GM (under its European branch Opel),

installed in Hungary to assemble parts imported from Germany for re-export back to

assembly operations in Western Europe. Also in Hungary, Ford invested 60 million dollars in

1990 to build a component plant to manufacture ignition coils and electronic fuel pumps

entirely for export (The New York Times, 1990).

3.4.3 The ASEAN production system

In the case of ASEAN countries, the regional integration is still weak, as several regional

agreements for the auto industry, failed to promote a regional division of labour.

Regional integration in ASEAN remained limited for two important reasons. On the first

place, the main four automotive manufacturers in the region continued to promote their

own national industries. Indonesia and Malaysia, in particular, adopted policies of promoting

their national auto industries with some degree of local ownership. Second, strong

52

differences in the preferences for vehicle types between ASEAN countries remained a

decisive factor, which prevented an effective division of labour.

This little level of regional integration can be seen in Table 3.9. Where for each of the

ASEAN-4 countries, only a reduced percentage of total component exports was directed

towards the other ASEAN vehicle producing countries, except for Singapore. The high level

of exports to Singapore might be re-exported.

Table 3.9 – Components trade between ASEAN-4 countries

Thailand is the second largest pick-up truck market in the world after USA and ASEAN's

largest automotive market and assembler. Thailand is a global source of pick-up trucks as

exports outside the ASEAN region (Runckel, 2005). About one-third of Thailand's total

vehicle production in 2005 of 928.081 units, which includes 597.914 pick-up trucks, was

exported last year to destinations ranging from Argentina to South Africa (Dawson, 2005).

According to Memedovic (2003), Thailand is an example of those countries which are not

included in effective regional groups (either because the countries in the region cannot

agree to integrate, or because there is no obvious regional group) so division of labour with

the non-regional world occurs, integrating the country as a global source of a specific type of

product, like pick-ups.

3.4.4 The Mercosur production system

The last regional productive system to mention is the Mercosur production system, that is

actually the integration of production between Brazil and Argentina, two of its four

members, as Paraguayan and Uruguayan automotive industries are still limited. In a

following chapter we will focus on the role of Argentina within this network, in this section

we will briefly analyze the regional system as a whole.

Thailand Indonesia Malaysia Philippines

Thailand - 1,2 2,9 9,2

Indonesia 1,1 - 1,9 1,8

Malaysia 3,5 2,1 - 0,7

Philippines 1,4 3 1,9 -

Singapore 19,5 31,2 17,4 0,4

Viet Nam 0,9 0,8 0,1 0,2

Japan 15,7 11,7 8,4 31,8

Others 57,9 50,1 67,5 55,9

Total 100 100 100 100

Source: UNIDO 2003

Exports from:Exports to:

Components trade between the ASEAN-4 countries in 1995

(percentage of total component exports)

53

According to Humphrey (1999), the regional Mercosur production system belongs to the

second group of emerging markets (those which are independent production and

consumption spaces, where regional production is oriented towards the domestic market).

However, for Memedovic (2003) Mercosur is not developing only on regional trade basis or

entering into a wider global division of labour, but performing both processes are at the

same time.

In 1990, the implementation of the Economic Complementation Agreement was the first

step to the integration of the Argentinean and Brazilian auto industries. The agreement

permitted tariff-free trade in automotive products between Argentina and Brazil, subject to

trade balancing and quotas. Regional trade in the industry increased as a result of three

factors: the signing of the Mercosur agreement in 1995, the reversal of trade liberalization

for vehicles adopted in Brazil in the early 1990s, and , the development of similar auto

industry policies between both Argentina and Brazil. The Mercosur car regime consisted of

the following measures (Tussie, 2002):

A nominal tariff of 35% (the highest granted to any industry).

Established local assemblers were allowed to import finished cars but required to

compensate imports with exports.

Local content requirements were lowered to 60 per cent.

Terminal plants were granted a 2% preferential import tariff on car parts and

components.

Non-established assemblers were allowed an import quota equivalent to 10 to 15 per

cent of total domestic production.

In spite of the highly managed intraregional trade and the significant external tariffs, a real

regional production system was developed in Mercosur during the 1990s. The relationship

between Argentina and Brazil was based on the division of labour in vehicle and components

production. Major components, such as engines and gearboxes, were sourced mainly from

just one of the two countries. Also the production of different type of models was

rationalized between the two countries, there is a trend of producing compact and small

vehicles in Brazil, and mid-sized vehicles and pick-ups in Argentina (Cañete , 2007).

We can see the significant increase of regional integration before and after the signing of the

Mercosur agreement in Table 3.10 and Figure 3.12.

54

Table 3.10 – Automotive trade between Argentina and Brazil in 1990 and 1996

Figure 3.12 – Automotive trade between Argentina and Brazil in 1990 and 1996

Between 1990 and 1996, the total value of trade in vehicles between both countries

increased from less than 18 USD million to more than one USD billion. Over the same period,

trading components increased from 95 USD million to over 800 USD million. A significant 95

percent of all automotive exports of Argentina in 1996 had Brazil as destination. Also the

main destination of Brazilian automotive exports in 1996 was Argentina, but with a relative

share of 54 percent of the total exported vehicles.

Value

(USD millions)

Share

(% of total Brazilian

automobile exports)

Value

(USD millions)

Share

(% of total Argentinean

automobile exports)

1990 16 3,9 1,8 10,2

1996 334,1 54 766,1 95,3

1990 43,9 8,2 51,1 40,1

1996 534,8 41 273,5 77,2

Source: UNIDO 2003

Automotive trade between Argentina and Brazil in 1990 and 1996

Cars

Components

From Brazil to Argentina From Argentina to Brazil

Product Year

0

100

200

300

400

500

600

700

800

900

Val

ue

(U

SD m

illio

ns)

Automotive trade between Argentina and Brazil in 1990 and 1996

Cars exports in 1990

Cars exports in 1996

Components exports in 1990

Components exports in 1996

From Brazil to Argentina From Argentina to Brazil

55

4. The Argentinean Automotive Industry

In 2010, the Argentinean Automotive Industry achieved a production of about 720.000

vehicles, beating all historical records for that country (Urgente24, 2011). In this chapter we

will firstly analyze the history and the different policies applied in the different periods of the

Argentinean Automotive Industry, later we will focus on the actual situation of assemblers,

and suppliers and, finally, we will estimate the actual level of fragmentation within this

industry.

4.1 Argentinean Automotive Industry History

4.1.1 From its origin until 1991

The Argentinean Industry of vehicles and components has its origin in the early 1930s. Since

that, and until 1954, this sector was limited to the assembly of mainly imported parts and

car-bodies, and an increasing production of spare parts. After 1952, the IAME (Aeronautic

and Mechanic State Industries) started to develop commercialization mechanisms for mass

production vehicles. By 1958, a National Promotion Regime for the Automotive Industry was

implemented generating a high-scale development process (Maceira, 2003). That Promotion

Regime had the objective to attract Foreign Direct Investments as the Government

considered that FDIs were the only way to continue with the import substitution model.

Foreign investments were given the same rights as locals, there were no blocks for foreign

companies to send back their profits to their home countries, they received tax benefits, and

they were guaranteed to operate under a strongly protected market (Santarcangelo, 2009).

Before the Promotion Regime, there were four assemblers operating in Argentina (two

national companies and two foreign), by 1964 there were 12. In Figure 4.1 we can see the

evolution of automotive production since 1959. Production increased from 32.000 units in

1959 to 218.000 in 1969. The local production of vehicles by the beginning of the 1960s

satisfied a 60 percent of the Argentinean market, by the end of that decade it covered 99

percent of the domestic demand.

56

Figure 4.1 – Automotive production of Argentina between 1959 and 2010

From the following decade, policies were focused in increasing the local content, reaching a

90 percent by 1970s. Under this schema, production reached a peak of 300.000 units by

1973, with a very limited number of exported vehicles of only 10.000 to 15.000 units (that

were mainly the result of special agreements). Import of vehicles decreased from almost

100.000 units in late 1950s to less than 2.000 units in early 1970s (Arza, 2007).

Nevertheless, between mid 1970s and the end of 1980s the Argentinean automotive

industry diminished its production at an average annual rate of 6 percent. By this time the

industry was mainly focused in serving the internal market, with a high degree of vertical

integration and far from the international standards of productivity (Maceira, 2003). The first

step towards liberalization in the Argentinean automotive sector was given in 1979 when the

blocks to import vehicles were removed, a schedule of decreasing tariffs for cars and

components was implemented, and the local content requirements were reduced. In 1981,

the imports of vehicles represented a quarter of the total sales. The external debt crisis that

started in 1981, and the following recession with high inflation during the whole decade of

1980s, were not the best scenario for the Automotive Industry in Argentina. Local

production was instable but always under 200.000 units, reaching a minimum of less than

100.000 units in 1990 (Arza, 2007).

4.1.2 From 1991 until the crisis of 2001

In 1991 the currency rate of Argentina was fixed with the dollar under the Currency Board

Law, the so called ‘one-to-one’ process as one Argentinean peso could be changed for one

US dollar. The Law was created with the objective to eliminate hyperinflation and stimulate

0

100.000

200.000

300.000

400.000

500.000

600.000

700.000

800.000

Qu

anti

ty o

f U

nit

s

Argentinean production of Automotive vehicles from 1959 to 2010

Source: Computed from ADEFA (2011)

57

economic growth (Keifman, 2004). That implied a context of increasing competition due to

international trade and stability. By 1992, the auto components industry in Argentina

consisted in about 500 companies, mainly localized around the three biggest cities of this

country, were also assemblers were located. About 60 percent of suppliers were based in

Buenos Aires, 21 percent in Cordoba and 12 percent around Rosario. Estimations indicated

that, at that moment, only half of the total of those companies were in economical and

technological conditions to face the new more competitive scenario (Maceira, 2003).

Since the beginning of 1990s, at an international level the automotive industry was moving

from Fordism towards Toyotism, that is, giving more and more importance to flexible

automation, Just-In-Time systems, multitasking and more skilled operators and a closer

relationship with suppliers. In parallel, the Mercosur was established as a free trade area.

This gave the opportunity to increase the potential market in exchange of a higher

competition. After the increased stability generated by the Currency Board, a significant

increase of local demand occurred. In fact, automotive sales grew from 100.000 units in

1990 to almost 350.000 in 1993. This increase of demand under a system with no restrictions

to vehicle imports would have implied domestic production to be replaced almost totally by

imported vehicles (Arza, 2007).

That is why in 1991 a specific automotive regime was established with the objective to

facilitate the reconversion into a more competitive Argentinean auto industry that would be

able to reach international standards. Theoretically, temporary protectionist measures were

the first step for companies to increase competitiveness so to be able to compete with

imported units in the future scenario of free trade. Between the protectionist measures we

can mention a maximum imported content of 40%, and a compensated trade system, for

which the quantity of imported vehicles was related with the quantity of exported units.

Facing this local and international challenges that resulted in increasing competition,

Argentinean-based assemblers and suppliers needed to improve the technical and

organizational aspects of its production sites to increase productivity. To achieve that, and

thanks to a more stable context of prices (due to the Currency Board), companies followed a

fragmentation strategy, splitting the previously vertically integrated productive processes.

This local outsourcing phenomenon was widespread in the whole automotive industry, from

assemblers to rather specialized suppliers (Maceira, 2003). So according to Curzon Price

(2001) model, the Specialization Dimension was moving towards more specialized firms,

with an increasing coordination by markets.

Productivity, measured as the ratio between produced vehicles and quantity of employed

workers, increased significantly from less than 6 in 1990 to almost 20 in 1998 (also a similar

trend can be noticed if the ratio is measured in worked hours instead of employed workers).

This was due to the investment in capital equipment, new organizational techniques and the

58

already mentioned de-verticalization of production systems through outsourcing. We can

see the evolution of productivity between 1959 and 2005 in Figure 4.2.

Figure 4.2 – Productivity of labor in Argentinean automotive industry between 1959 and 2005

Although productivity improved, the Argentinean automotive industry was not able to reach

high international standards. In Figure 4.3 we can see the productivity of labor measured as

the added value (in USD) per employee, and compare the Argentinean ratio with selected

countries for 1998 and 2001. The difficulties in reaching higher levels were due to the

impossibility for the local automotive industry to achieve economies of scale and

technological best practices. According to Arza (2007) some projects launched during the

1990s had opportunistic objectives, seeking for the benefits from the promotional regime.

For Bastos Tigre (1999), the Argentinean production sites were at a similar level of operative

efficiency with the Brasilian ones, and even (in some cases) with the international

production benchmarks. The main problems he mentions are the low scale of production

and the suppliers structure.

Per thousand hours Per employee

0

5

10

15

20

Qu

anti

ty o

f Pro

du

ced

veh

icle

s

Productivity of labor in Argentinean automotive industry from 1959 to 2005

Source: Arza (2007) from ADEFA

59

Figure 4.3 – Productivity of labor in the automotive industry for selected countries in 1998 and 2001

The long recession that started in 1998 gave place to the worst economical crisis in the

Argentinean history. Only in 2002 the GDP diminished 11 percent, and compared with GDP

in 1998 it was 18 percent lower. Between 1998 and 2002, according to CEPAL (Economic

Commission for Latin America) the gross fixed investment drop 56 percent and consumption

20 percent. In December 2001, the end of the Currency Board came together with a deep

crisis of the financial system, where a massive bank run generated liquidity problems,

including the blockage of all private deposits. This caused a halt in the payment chain and

financing of domestic economy (Maceira, 2003). In parallel there was also an institutional

crisis that included the resignation of the president in charge. The default of the external

public debt was declared and the local currency, the Argentinean peso, depreciated rapidly

in comparison to the US dollar, reaching equilibrium at a 3 to 1 parity, significantly different

to the 1 to 1 parity of the last ten years of Currency Board times.

The automotive sector was strongly hit by the crisis. In 2002 sales were only 82.000 units,

that is the lowest number since 1960, and just an 18 percent of the 1998 sales. As we can

see in Figure 4.1, production, instead, was reduced to 160.000 units, that is a 35 percent of

1998 numbers. The drop in production was partially softened by the possibility of exporting

thanks to the convenient currency rate. For the first time in the history of the Argentinean

automotive industry, the assemblers were able to compensate at least to some extent the

domestic reduction of demand with exports (Arza, 2007). Levels of employment and worked

hours were the lowest since 1959. The long lasting effects of the crisis could be exemplified

considering that in 2006 (when GDP was already a 15 percent higher than in 1998 thanks to

4 years of continuous growth), vehicle sales were only 1,1 percent higher than in 1998, and

production was still a 5,6 percent lower.

0

50.000

100.000

150.000

200.000

250.000

300.000 A

dd

ed

val

ue

in

USD

pe

r e

mp

loye

e

Productivity in the Automotive sector (CIIU 341) in selected countries for 1998 and 2001

1998

2001

Source: Computed from Arza (2007)

60

4.2 Actual situation of the Argentinean Automotive Industry

Since 2002, a strong increase in production of vehicles was noticed, growing almost 4,5

times, from about 160.000 units in 2002 to 720.000 produced in 2010, as we can see in

Figure 4.1. The Argentinean local production of 2010 beat all historical records. In addition,

as recently announced by ADEFA (the Argentinean Assemblers Association) and the Ministry

of Industry, the planned production for 2011 is of about 840.000 vehicles (ADEFA, 2010).

The reactivation of the domestic market under a high currency rate scenario is the main

factor that has revitalized the investment flows towards the automotive sector. During the

last four years most of the companies announced their investment plans both for installing

new production lines, or to optimize production processes. In the first group we can mention

PSA Peugeot Citroen with the 308, 408 and C4, Volkswagen with the Suran and Amarok,

Renault with the Fluence, Daimler with the Sprinter, Ford with the new Focus and GM with

the Agile and Fiat with the new Palio. In the second group of significant investments to

improve production processes we can mention Toyota with a new body plant and a recent

announcement in late 2010 of Volkswagen investing 155 million dollars to increase its

production of gearboxes in a 40 percent (Autoblog, 2010). The announced investments in

the automotive industry for the period between 2002 and 2008 can be seen in Figure 4.4.

The growing investments trend seems to continue in the following years as a survey done in

2010 by the consultancy company KPMG, when asking major executives of assemblers, first

and second tier supplier companies, about which individual countries outside the BRICs will

attract auto investment in the coming five years, Argentina was in the second position for

Latin America. As Brazil is part of the BRIC group, the ranking of the survey was Mexico in

first position with 71 percent, Argentina in second place with 19 percent followed by Chile

with 6 percent, Venezuela 3 percent and Bolivia 1 percent.

Figure 4.4 – Announced investments in the Argentinean automotive industry between 2002 and 2008

124 142

384418

287 302

612

0

100

200

300

400

500

600

700

2002 2003 2004 2005 2006 2007 2008

An

no

un

ced

in

vest

me

nts

in M

illio

n A

RS

Announced investments in the Argentinean automotive industry

between 2002 and 2008

Source: Computed from CEP Argentinean Ministry of Production (2009)

61

In the Figure 4.5 we can see the employment level in the Argentinean auto industry for

suppliers and assemblers. In the period 2002-2006, the total quantity of employees

(considering assemblers plus suppliers) doubled, passing from about 36.500 workers to

74.500 (CEP, 2009). We can notice that a similar relation as the one we mentioned in Figure

3.4 for the Automotive industry in the United States, about two thirds of the workers are

employed in the supplying industry and the remaining one third in assembling companies.

Figure 4.5 – Employment in the Argentinean automotive industry between 2002 and 2008

4.2.1 The Vehicles Industry

After the crisis of 2001 the main market for vehicles resulted to be the external market,

considering that in the period 1991-2001 the average share of exports was 29 percent and

that in the period 1996-2001 it was 45 percent, while between 2002 and 2008, an average of

60,8 percent of the production was exported. (CEP, 2009). We can see the evolution of

automotive vehicle exports for Argentina in Table 4.1.

Table 4.1 – Vehicle exports from Argentina between 2002 and 2008

In 2009 the main destination of Argentinean exports of vehicles was Brazil with an 88,4

percent of the total, Mexico was in a far second position with a 5,4 percent. The importance

0

10.000

20.000

30.000

40.000

50.000

60.000

2002 2003 2004 2005 2006 2007 2008

Qu

anti

ty o

f e

mp

loye

es

Employment of Assemblers and Suppliers in the Argentinean automotive industry 2002 - 2008

Employees of Assemblers

Employees of Suppliers

Source: Computed from CEP Argentinean Ministry of Production (2009)

2002 2003 2004 2005 2006 2007 2008 2009 2010

Exported units (in thousands) 123 108 146 182 237 316 351 322 448

Exported units as share of production (%) 77,2 63,7 56,2 56,8 54,8 58,1 58,8 62,9 62,5

Source: ADEFA (2010)

Exports of Vehicles produced in Argentina between 2002 and 2010

62

of Brazil as a destination is a constant in the last years as a similar distribution can be found

even in the first months of 2011 according to ADEFA last report.

In Figure 4.6 we can see the main destination of Argentinean motor vehicles in 2009.

Considering that all of the assemblers installed in Argentina have their headquarters in the

Triad regions, that is, the US (GM and Ford), Western Europe (Fiat, Iveco, Mercedes, PSA,

Renault and VW) or Japan (Toyota), exports to their home markets are very low, with a total

of less than 2,5 percent between the three destinations. So the importance of the protected

Regional Mercosur market (through the measures detailed in point 3.4.4, and mainly with

the 35 percent tariff) is remarkable noticed by the significant share of Brazil (88 percent), but

also with an almost 2 percent of exports to Uruguay, being the third main destination and

considering its relatively small sized market. The importance of Mexico as second

destination (5,8 percent) has also an explanation regarding international agreements, as

Mercosur has signed in 2006 a set of bilateral agreements with this Spanish speaking North

American country. Each member of Mercosur made a free-trade bilateral agreement with

Mexico regarding cars, trucks, and agriculture tractors (Argentinean Sub-secretary of

Industry, 2008).

Figure 4.6 – Destination of Argentinean exports of motor vehicles in 2009

A significant 60 percent of the vehicles that were sold in Argentina during 2009 were

imported. These imported vehicles were produced mainly in Brazil, with a relative weight of

an 80 percent of total imports, in second position (and following a similar pattern as exports

of vehicles) is Mexico with a 9,7 percent, then Korea with 3,1 percent and Germany with 2,5

percent, the remaining 5 percent of the vehicles was sourced from other countries (ACARA,

2010).

Brazil, 88,4%

Mexico, 5,4%

Uruguay, 1,7%

Europe, 1,1%

Colombia, 0,8%Rest of America, 0,8% Chile, 0,7%

Asia, 0,4%

Others, 0,7%

Argentinean motor vehicles exports per country in 2009

Source: ADEFA 2010

63

4.2.2 The Parts and Components Industry

Regarding the components of vehicles, production was growing following the increase of

vehicle production, but at an average annual rate of 7,4 percent between 2002 and 2008

(more modest than the 23,4 percent average annual rate for vehicles in the same period),

resulting in production levels of components for 2008 a 53 percent higher than those for

2002 (CEP, 2009).

In Figure 4.7 we can see the evolution of trade in parts and components.

Figure 4.7 – Parts and Components trade of Argentina between 1995 and 2009

About the destination of automotive exports in parts and components the main importer, as

well as with vehicles, is Brazil, with more than a 66 percent of the total share in value. Here,

as well as with vehicles exports, Mexico has a significant share (of 4,4 percent), and other

Latin American countries have a major weight of 11,4 percent if grouped together. What

contrasts with vehicles exports, is that the weight of US and European destinations for parts

and components is much more relevant. The US have a 5,4 percent of share and Western

European countries, if grouped together represent more than a 7 percent.

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

USD

Mill

ion

s

Parts and Components Trade for Argentina 1995-2009

Exports

Imports

Source: AFAC (2010)

64

Figure 4.8 – Destination of Argentinean exports of automotive parts and components in 2010

When analyzing the type of exported components based on data from AFAC (2010) in Table

4.2, we notice that gearboxes represent almost a 40 percent of the share in value for the

first semester of 2010, in second position we find engine components (12,8 percent)

followed by stamped body parts (10,8 percent).

Table 4.2 – Automotive parts and components exports from Argentina for the 1st

semester 2010

Brazil, 66,3%

US, 5,4%

Mexico, 4,4%

Venezuela, 3,9%

Chile, 3,3%

Spain, 3,2%

Uruguay, 2,1%

Germany, 1,8%

France, 1,4%

Paraguay, 1,3%

Colombia, 0,8% Italy, 0,8%South Africa, 0,7%

Others, 4,6%

Argentinean parts and components exports per country in 2010

Source: AFAC (2010)

Type of part Value (USD) Share

Gearboxes 461.780.580 39,1%

Engine components 150.517.762 12,8%

Body parts 127.905.019 10,8%

Wheels 110.827.041 9,4%

Electric components 84.888.641 7,2%

Engines 64.922.759 5,5%

Steering column and suspension system 53.204.522 4,5%

Interior equipment 44.012.806 3,7%

Brakes 10.077.253 0,9%

Heating and air conditioning system 4.186.221 0,4%

Forged and cast iron parts 3.219.439 0,3%

Others 64.691.925 5,4%

Total 1.180.233.968 100,0%

Source: AFAC (2010)

Automotive parts and components exports of Argentina 2010 (1st Semester)

65

5. Fragmentation of Automotive Production in Argentina

At the beginning of this Thesis, I mentioned that there were two questions that I wanted to

address. The first one was regarding the extent a car-maker should fragment its production

to serve the Argentinean market, so on one extreme we should have a car fully designed and

produced in Argentina, while on the other, a car should be completely produced abroad and

imported. At this point we understand that Argentina is immersed in a Regional Production

System together with Brazil. Furthermore, Brazilian market, five times the Argentinean one,

is very relevant as more than 80 percent of the produced units during 2010 in Argentina

were exported to that destination, but also about half of the vehicles sold in 2009 in

Argentina were imported from that country. So regarding this first question, we will consider

a medium step of fragmentation between the global and the domestic production, that is

the regional alternative.

The second question was a consequence of the first one, if some part of the production of an

automotive vehicle is worth to be fragmented in Argentina, I wanted to address if Argentina

can become a global producer for that specific part of the process. Regarding this question

we should consider now also the option of Argentina as a regional producer of a specific part

of the process.

Through this chapter we will try to detect what parts of the automotive production process

can be fragmented in Argentina and we will analyze the actual level of fragmentation of

those chunks. The research will include some cases of successful application of

Fragmentation in the Argentinean automotive industry. Finally, we will mention how

Argentina can benefit from this fragmentation to conclude with some recommended

policies.

5.1 What parts of the automotive production process can be fragmented?

As we have seen in chapter 3 when analyzing the centralization or decentralization strategies

of the value chain, several factors are considered. But first it is important to indentify in

which parts the process can be fragmented and then decide the most suitable strategy.

Considering our initial problem of serving the Argentinean market within the Mercosur

regional automotive market we can identify different levels:

1. A first level differs between a centralized production system where the whole

production process takes place (most probably in one of the Triad countries, but in

general in any country outside the Mercosur region), and a vehicle produced within

the Mercosur region.

66

2. At a second level, if a vehicle is at least partially produced within the Mercosur limits,

we can start to consider the fragmentation of the production process itself. In

particular between the Research & Development activities (R&D), and production

itself.

3. In the third level we can split the production into assembly activities (that is,

generating a vehicle as an output), and supply activities (the production of parts and

components). It is important to notice that while assembly activities are performed

only by car-makers, supply activities could be done by car-makers themselves or any

of the already discussed first-tier supplier companies. To keep a clear analysis, we

won’t focus on the Curzon Price’s (2001) Specialization Dimension, as we have

already mentioned the trends affecting relationships between assemblers and

suppliers in Chapter 3, but we will concentrate in the Spatial Dimension.

4. The fourth and final level of our analysis divides the assembly according to the type

of final output (that is, the type of vehicle), and a similar logic is applied for the

supplying activities (classifying different groups of parts and components). Within the

type of vehicles we can mention small cars, medium cars, commercial vehicles and

pick-ups. Regarding the group of parts and components, we can differentiate them

according their complexity in electronic modules and other complex systems, engines

and gearboxes, and other more simple parts.

After detailing the different levels of Fragmentation of production of the automotive

industry, we can develop a ‘Fragmentation Map’ as we can see in Figure 5.1.

Figure 5.1 – Fragmentation Map of Automotive Production in Mercosur

Other parts

Electronic & complex

Commercial vehicles

Medium cars

Mercosur Regional Automotive Market

Totally Imported vehicles

ProductionR&D

Parts & Components

Assembly

Small cars

Pick-ups

Engines & Gearboxes

Total or Partially Regional Produced vehicles

67

5.2 The Actual level of Fragmentation

5.2.1 The First Level: Regional or Centralized production?

Regarding this first level analysis, that affects the Argentinean automotive industry as it is

inserted in the Mercosur Regional production system, car-makers have to decide if they will

import finished vehicles from an external country or to produce it within the region. Here

the main driver of the decision is the size of the market that might condition or favor the

economies of scale. Producers already installed in the Mercosur, and best sellers, can reach

the market volume to produce regionally for the most massive segments. All of the

established car-makers, like Ford, PSA Peugeot Citroen, Volkswagen, Renault, Fiat, GM,

Toyota and Honda produce in the region their vehicle models for the small car and medium

car segments, and if available in their catalogue, they produce also regionally their

commercial vehicles and pick-ups. Those eight automotive groups together were responsible

for a 90 percent of the total vehicles sold in the Brazilian-Argentinean market in 2010

(ANFAVEA, 2011 and AFAC, 2010). The other car-makers belonging to the remaining 10

percent of the market share, are usually not producing in the region. An alternative of

producing in the Mercosur is importing certain massive models from Mexico thanks to the

free trade agreement mentioned in Chapter 4. That is the case of VW Vento (a medium car)

or Ford Fiesta Kinetic (a small car).

It is worth to notice that we were considering the most massive vehicle segments (small and

medium cars, commercial vehicles and pick-ups) that in total concentrates a 97 percent of

the Brazilian-Argentinean market (ANFAVEA, 2011 and ACARA, 2010). For the remaining 3

percent of the market, that is, large cars and premium vehicles categories, all assemblers are

importing their vehicles from outside the Mercosur region. That is the case for large cars of

generalist brands, for example the VW Passat, the leader in its segment, is imported from

Germany (but also the Renault Laguna is imported from France, the Toyota Camry from the

US and the Ford Mondeo from Belgium). For premium brands (Audi, BMW, Mercedes Benz)

not only the relatively small scale is an issue, but also the brand image. Audi produced in

Brazil its entry-level model, the A3, between 1999 and 2006 but it was not well received by

the market and it was decided to import it again from Germany. Similar problems faced

Mercedes Benz with the production of its Class A model, the same that we have analyzed in

Chapter 3 when discussing the integration of a new production site into a Global Supply

Network, that in 2005 ceased the production of this model in its Brazilian site of Juiz de Fora.

In Figure 5.2 we resume the increasing relationship between International Fragmentation of

Production and Market Size.

68

Figure 5.2 – Relationship between International Fragmentation of Production and Market Size

5.2.2 The Second Level: Splitting R&D and Production

In Chapter 3 we have analyzed the general trend of location of the Research and

Development activities. We considered the general case of Volkswagen and Toyota, and

based on Miller (1992), Schmid (2008), and Mayer (2001), we understood that the global

situation is a concentration of high value added R&D activities in the Triad region. In this

case, Mercosur is not an exception, as most of the regionally produced vehicles were

designed in their home countries or other Triad branch of the car-maker companies. This is

obeys the global trend of standardization of platforms to maximize the benefits of follow

sourcing and global supply networks. Nevertheless, in the last decade some R&D activities

were performed in Brazil as we can see in the Fiat Palio Case.

5.2.2.1 The Fiat Palio Case

In this case we will discuss the Fiat Project P178, that gave as a result the model vehicle

called Fiat Palio in the late 1990s. This case was analyzed by Ciravegna (2003) and he

considers it was a significant step for the region as the car was developed for emerging

markets, by a team of Argentinean, Italian, and Brazilian engineers, using local knowledge

about consumer preference in the Mercosur as a reference, as originally it was meant to

target only the Mercosur. Later it was produced in other developing countries and even

exported to some European countries like Italy. As stated by one executive from Fiat, the

idea of the project was to develop a regional strategy: ‘Having decided to focus on South

International Fragmentation of

Production

Market SizeLarge cars and

Premium segmentPick-ups and Commercial

vehicles

Small cars

Centralized Production

Regional Production

Medium cars

69

America, being present in both Brazil and Argentina, and forecasting high intra-regional tariff

reductions, the most appropriate strategy seemed to be maximizing the benefits of regional

integration, a regional strategy. As the Mercosur automotive agreements proceeded, a team

of Fiat engineers was developing a low niche car, basically an upgraded Uno, which could be

produced in a complementary way between Argentina and Brazil, in order to avoid

duplication and improve economies of scale.’ The role of Fragmentation is taken into

consideration since the design phase, as one step of the project was to implement an

endogenous process of modularization, de-integrating production into detachable parts, so

that costs of production of each part could be easily identified, and economic activities

distributed in more efficient ways along regional and global value chains.

Other similar and more recent examples from other assemblers are the development of the

Chevrolet Meriva, the Volkswagen Fox, and Chevrolet Agile that started their production in

Brazil in 2002 and 2003, and in Argentina in 2009, respectively. This cars were based in

already existing global platforms of their producers, but the design of the body and several

components was performed locally in Brazilian design centers of the assemblers. So we can

notice an increasing trend, of performing R&D activities in the region (all Brazilian based) to

develop local adapted vehicles over standard global platforms.

In Figure 5.3 we can see the decreasing relationship between International Fragmentation of

Research and Development Activities, and the Value Added by those activities.

Figure 5.3 – Relationship between International Fragmentation of R&D and Value Added of R&D

International Fragmentation of

R&D Activities

Value Added of R&D

Adapting Platforms to Local Market

Full Concept and Design

Centralized R&D Activities

Regional R&D Activities

70

5.2.3 The Third Level: Splitting between Assembly and Supply of parts and components

In this Third level we split the Production activities into Assembly of automotive vehicles and

Supply of parts and components. As we mentioned before performing the Fragmentation

Map, we will focus only in Curzon Price’s (2001) Spatial Dimension. In Table 5.1 and Figure

5.4, we analyze the Balance of Trade of Argentina regarding vehicles (as an indicator of

Assembly), and parts (as an indicator of Supply). We notice that between 2001 and 2002 the

balance was positive for vehicles, then negative for the 2003-2008 period and positive in

2009. Regarding parts and components, the balance is almost even for the period 2001-

2005, and then a negative tendency is more notorious for the 2006-2009 period.

Table 5.1 – Balance of Trade of Vehicles and Parts of Argentina with Brazil between 1991 and 2009

Figure 5.4 – Argentinean Balance of Trade with Brazil for Automotive categories between 1991 and 2009

Considering only the data of 2009 one might be tempted to conclude that Assembly

activities tend to be located in Argentina, while the Supply of parts and components is

2001 2002 2003 2004 2005 2006 2007 2008 2009

Exports of Vehicles to Brazil 1.289 691 410 568 884 1.556 2.498 3.617 3.973

Imports of Vehicles from Brazil 526 214 758 1.729 2.456 2.817 3.541 4.723 2.769

Balance of Trade of Vehicles with Brazil 764 478 -348 -1.161 -1.572 -1.261 -1.043 -1.106 1.204

Exports of Parts to Brazil 241 207 220 356 466 510 681 868 678

Imports of Parts from Brazil 288 170 211 345 517 812 1.048 1.433 1.227

Balance of Trade of Parts with Brazil -46 37 10 11 -50 -302 -367 -566 -550

Total Automotive Balance of Trade with Brazil 717 515 -338 -1.150 -1.622 -1.564 -1.410 -1.672 654

Source: Computed from Argentinean Ministry of Industry (2011)

Balance of Trade of Vehicles and Parts of Argentina with Brazil 1991-2009 (in USD Millions)

-2.000

-1.500

-1.000

-500

0

500

1.000

1.500

2001 2002 2003 2004 2005 2006 2007 2008 2009

Bal

ance

of

Trad

e (

USD

Mill

ion

s)

Argentinean Balance of Trade with Brazil for Automotive categories for 1991-2009

Vehicles Parts Total Automotive (Vehicles and Parts)

Source: Computed from Argentinean Ministry of Industry (2011)

71

sourced from Brazil. However, as we can see in Figure 5.4, the curves of Balance of Trade

con suffer sudden changes and there are no specific conditions that might favor

fragmentation in Argentina or Brazil of Assembly or Supply. One major reason for this

changes leading to equilibrium between both countries is intrinsic in the Bilateral

Automotive Agreement, that imposes conditions to regulate the regional trade. Those

conditions are based in the ‘flex’ coefficient that establishes the level of bilateral trade free

of tariffs for vehicles and parts. Its value indicates the maximum amount in dollars that a

country can import from the other for each exported dollar to the other. A higher value

implies the possibility of a negative balance of trade (more imports than exports). So, the

lower the flex is, the higher is the protection of trade. In 2008 an increasing protection for

the Argentinean automotive industry was negotiated, establishing for the first time an

asymmetric coefficient between both countries for a five year period (CEP, 2009). Actual

valid flex coefficients until 2013 are 1,95 for Argentina and 2,5 for Brazil.

5.2.4 The Fourth Level: Complementary Production of vehicles between Argentina and Brazil

Considering the very dynamic changes that the Argentinean automotive industry is

experiencing in the last years and its strong relationship with the Brazilian market, we

performed an up-to-date analysis of the models that are produced in Argentina to try to

identify if their production is ‘exclusive’ for Argentina. In the literature (CEP, 2009; Arza,

2007) is accepted that if a vehicle model is produced only in one country of a regional

market, the other members will import this model from the former. This make sense

because protection tariffs would discourage other members to import that model from

outside the regional market. On the other hand, by specializing the production of specific

vehicle models in specific countries, economies of scale take place benefiting the whole

region as we detailed in previous chapters.

72

Table 5.2 – Vehicle models produced in Argentina at March 2011

From Table 5.2 we can see that 8 assemblers are producing cars and commercial vehicles in

Argentina, if we consider the production of chassis for trucks we should also add to the list

Iveco, and Scania should be added if we consider its production of transmission components.

It was also announced by the Argentinean Ministry of Industry that by March 2011 Honda

will start the production of a vehicle model called City in its brand new plant in Buenos Aires

(Autoblog, 2011). That will imply a total of 11 assemblers in Argentina, with 10 of them

producing at least some type of vehicle.

We can notice that 15 out of the 22 models produced in Argentina, that is two thirds of the

total, have regional exclusivity. In terms of quantity of units the relative shares are similar 67

percent of the vehicles produced in 2010 (476.217 units) where assembled in Argentina for

the whole Mercosur region. This percentage seems to be growing as all of the last models

that started its production in the last five years in Argentina were exclusive for the region,

where we can count GM Agile, Mercedes Sprinter, PSA’s C4 and 408, Renault Fluence and

VW Amarok. The only exception is the case of Fiat that in 2008 re-started the production of

its Siena and Palio models (also produced in Brazil) because of an increase of demand, but

Model Manufacturer Segment TypeRegional

exclusivity

Production 2010

(Units)

Palio Fiat Small car No 1.990

Siena Fiat Small car No 94.069

Focus Ford Medium car Yes 51.654

Ranger Ford Pick-up Yes 44.800

Agile GM Small car Yes 89.028

Corsa GM Small car No 37.830

Corsa Combo GM Commercial Vehicle No 960

Sprinter Mercedes Benz Commercial Vehicle Yes 14.253

C4 PSA Medium car Yes 37.425

Berlingo PSA Commercial Vehicle Yes 5.204

206 PSA Small car No 6.065

207 PSA Small car No 43.824

307 PSA Medium car Yes 21.091

408 PSA Medium car Yes 263

Partner PSA Commercial Vehicle Yes 13.096

Symbol Renault Medium car Yes 18.654

Clio Renault Small car No 47.445

Fluence Renault Medium car Yes 1.727

Kangoo Renault Commercial Vehicle Yes 23.486

Hilux Toyota Pick-up Yes 70.032

Suran Volkswagen Small car Yes 40.981

Amarok Volkswagen Pick-up Yes 44.523

Source: computed from ADEFA (2011)

Vehicle models produced in Argentina in 2011

73

these two models are not new and had already been produced in Argentina since 1997 until

being interrupted due to the crisis of 2001.

Furthermore, we can distinguish a pattern within this regional specialization of production.

All models of Medium cars, all Pick-ups and 98 percent of Commercial vehicles units

produced in Argentina have regional exclusivity. This is the strategy that most of the

assemblers are following as it was recently declared by the CEO of PSA Peugeot Citroen

Mercosur, confirming that also PSA will concentrate furthermore the production of small

vehicles in Brazil and will produce all its medium sized cars in Argentina. As declared by the

executive, the main reasons of this increasing specialization between both countries was to

improve the efficiency of the production sites and to generate better conditions to negotiate

with its suppliers (Tiempomotor, 2011). According to Bastos Tigre (1999), in Europe efficient

scales of production for medium sized vehicles ranges from 70.000 to 200.000 units/year,

while for small cars is of about 350.000 units/year. The Brazilian market of 3,5 million

vehicles sold in 2010 (ANFAVEA, 2011), is five times bigger than the Argentinean one, with a

bit less of 700 thousand vehicles sold in 2010. This is one of the main drivers of the

concentration of production of small vehicles in Brazil, that allows the production of this

type of vehicles at an efficient scale. Also the differences in the market preferences affects

the complementation of production, in Brazil sales of small vehicles represented a 75

percent of the total in 2010 (ANFAVEA, 2011), while in Argentina the preferences between

vehicles were a bit more homogeneous with small vehicles representing a 54 percent of the

total in 2009, medium vehicles a 28 percent, pick-ups a 12 percent, and a 6 percent for

commercial vehicles (ACARA, 2010). We can see the relative significant importance of

medium cars, pick-ups and commercial vehicles for Argentina in Figure 5.5.

Figure 5.5 – Unit sales per type of vehicle in Argentina in 2009

Small cars, 53,9%Medium cars, 28,3%

Pick-ups, 11,9%

Commercial vehicles, 3,5%

Other vehicles, 2,4%

Unit sales share per type of vehicle in Argentina in 2009

Source: computed from ACARA (2009)

74

In Figure 5.6 we can see the increasing relationship between International Fragmentation of

Production in Argentina of different vehicle segments, and the relative importance of the

market share of those segments in the Argentinean market with respect to the Brazilian

market. That is, if small cars have a 75 percent of market share in Brazil and a 54 percent in

Argentina, production will be located in Brazil.

Figure 5.6 – Relationship between Fragmentation of Production in Argentina of different Segments and

Relative Market Share of those Segments in comparison with Brazil

5.2.5 The Fourth Level: Local, Regional and Global Sourcing of Parts and Components

In the Fragmentation Map of Figure 5.1, in the fourth level, we split the supply of parts and

components into three main categories related with the technological complexity of the

parts. In Chapter 3, we mentioned that as a consequence of follow sourcing, assemblers

would like to have the same suppliers and the same parts wherever their production sites

are located. Based on Memedovic (2003) we mentioned that in a fully globalized auto

industry there is a strong tendency to centralize the production of more complex

components at a limited number of sites. In Table 5.3 we can see the Net Imports of

Argentina (calculated as the difference between imports and exports) for different part

categories with selected countries. Categories were organized by decreasing complexity,

however it is worth to notice that within a same category can coexist very different degrees

of technology. For example in the relatively complex Electric components category we can

find the computer module that commands most the logical software of a car, and a simple

electronic switch for the dome light.

International Fragmentation of

Production in Argentina

Relative Market Share of the

Segment with Brazil

Pick-ups and Commercial

vehicles

Small cars

Regional Production in

Brazil

Regional Production in

Argentina

Medium cars

75

Table 5.3 – Argentinean Balance of Trade of Parts and Components in 2010

We can see that as complexity decreases, also the value traded of components decreases.

For more complex items such as Electric components, Argentina has significant imports and

very few exports (negative Balance of Trade, or positive Net Imports). This is a consequence

of centralization strategies that imply few production sites with global reach. The impact of

economies of scale in the cost of production of this components is significant enough to

cover for the additional transportation and coordination costs of centralized production.

For still relatively complex categories like Engines, Gearboxes and Engine Components,

Argentina has also significant Net Imports, but this case if different. Grouping the three

categories (Engines, its components, and Gearboxes) Argentina exported 452 USD Million in

the period to Brazil and imported 877 USD Million from the same country, it even has Net

Exports of Engines to China and Italy and of Gearboxes to Spain. Actually this group is the

only set of categories in which Argentina has Net Exports with the selected countries of

Table 5.3. Here we can detect a Regional supply network due to the very significant trade

between Argentina and Brazil. A particular case of supplier inserted in the Mercosur supply

network can be seen in the Volkswagen Cordoba Case.

Regarding the remaining categories with less technological content, even though imports are

higher than exports, the value traded is much lower. This is because for this less complex

type of components assemblers look for follow sourcing to the local destination. So, for this

last set of categories we can see a more Domestic strategy. This is due to transportation and

coordination costs that are more significant in the relative weight of the final cost of this

parts. In the Plastic Omnium Case we will see an example of follow sourcing.

Brazil Thailand China Japan Italy France Spain Germany Total

Electric components 161 8,2 41,8 17 11,8 19,5 12 29,9 301,2

Engines 243 0 -4,1 3,5 -3,9 7,7 4,9 58,28 309,4

Gearboxes 114 11,5 20,4 83 19,61 19 -19,6 69,7 317,6

Engine components 68 45 22,3 48 11,7 19,7 7,8 22 244,5

Interior equipment 86 41 118,3 8 1,87 6 4,7 9,9 275,8

Air conditioning system 12,1 1 17 0,4 0,8 3,8 0,8 3 38,9

Steering and suspension system 53 2,3 1,8 1 1,7 4,5 3,4 2,2 69,9

Body parts 81 15,5 4 2 23,8 37,6 39,9 40,9 244,7

Wheels 91 3,4 12,2 9,2 2,8 7,5 6 9,4 141,5

Brakes 66,6 0,1 0,9 0,7 1,4 1,3 0,9 3 74,9

Forged and cast iron parts 24 3 3,8 0,4 2 4,2 2 5,7 45,1

Other rubber parts 17 2,8 1,8 0,9 3 2,6 1,3 3,3 32,7

Other metallic parts 3,6 0,5 7,8 0,7 3,4 0,6 0,6 2,3 19,5

Other plastic parts 9 3,2 11,8 1,7 3,2 4,1 4,8 8,6 46,4

Other various parts 19,4 5,4 6,6 4 3,4 5,6 1,55 6,5 52,5

Note: Net Imports = Imports - Exports

Source: computed from AFAC (2010)

Dec

resi

ng

com

ple

xity

Argentinean Net Imports of Parts and Components with selected countries in 2010 (1st semester, in USD Millions)

76

5.2.5.1 The Volkswagen Cordoba Case

As stated by Memedovic (2003), some producers within a Regional supply network might be

able to export their products out of the region. This is the case of a Volkswagen gearboxes

production plant located in the Cordoba province, in the center of Argentina. A very

significant 95 percent of its production is exported, reaching values of 335 USD Million per

year that represent about a 15 percent of the total value of 2010 Argentinean exports in

parts (Velocidad Cero, 2010). Besides the major percentage of production that is exported,

what make this case attractive is that it goes beyond the Regional borders, with almost a 40

percent of its exports outside the Mercosur. This plant produces two main type of

gearboxes, the MQ 200 and its automatic version, for smaller vehicles, and the MQ 250 for

larger vehicles. The MQ 200 type is exported to Brazil (representing a 60 percent of the

exports of this plant), and the MQ 250 is exported to Spain, Germany, Czech Republic,

Mexico and South Africa. As stated by Mauricio Businello, a Volkswagen executive, in a

recent interview to Car-Magazine (2010), ‘one out of 6,5 VW cars in the world rely on a

gearbox produced in Cordoba, Argentina’. Only two other plants in the world, located in

Spain and Czech Republic, are producing the MQ 200. The executive mentioned that the

factors of success of this production site are logistics ‘we have a logistics system that always

worked perfectly, not even during the worst economical crisis of Argentina a VW plant in any

part of the world was out of stock of our gearboxes’, and production quality ‘we are

considered to be in the top-five ranking within the production sites of the whole Volkswagen

Group’. Several awards seem to confirm the recognition in this last success factor as the

Cordoba production site has been awarded with the Argentinean National Quality Award in

2005, the Volkswagen Excellence in 2007 (granted by VW headquarters to the best Parts and

Components manufacturer of the Group), and the Latin American Quality Award in 2008. A

recent investment in 2010 of 155 USD Millions to increase a 40 percent the production

capacity (Autoblog, 2010), seems to confirm the decision of Volkswagen headquarters to

continue with this Regional supply strategy combined with significant global exports.

5.2.5.2 The Plastic Omnium Bumpers Case

As an example of follow sourcing to produce relatively less complex parts at a local level, I

will mention the case of Plastic Omnium. While working in Argentina for a logistics company

called Gefco (that is part of the PSA Peugeot Citroen Group), I was part of a project team

with the objective to help establish in Buenos Aires a French producer of plastic components

called Plastic Omnium. In 2007 the car maker PSA Peugeot Citroen was planning to start the

production of a new model, the Citroen C4, in its plant located in El Palomar, Buenos Aires.

Since 2004, the same model was already produced in Mulhouse, France, where Plastic

Omnium was providing the front and rear plastic bumpers. The decision was to use the same

provider in Argentina so to maintain the quality level and coordination mechanisms as in its

77

home country in France. This type of product has specific characteristics that made it

extremely expensive to be sourced from locations far from the assembler’s production site.

In particular, we can identify two factors:

Transportation Costs: bumpers have big dimensions (as it is one only single piece for

protecting the front and one for the back of the car), and their cost of production is

relatively low considering its size (because they are made by plastic injection). Thus,

international transportation costs would be much higher than the cost of production.

Coordination Mechanisms: in modern vehicles, bumpers are adapted to the trim level

of equipment of each version. That is, they should match the color of the rest of the

car, and for highly equipped versions they should also be customized with anti-fog

lights, parking sensors and chromed accessories. Keeping stocks of all those variants

would imply huge financial costs for automakers. Consequently the coordination

mechanism more suitable for this type of products is the Just in Time, which requires

to locate suppliers close to assembly sites.

Plastic Omnium found a location only 45 minutes away from PSA Peugeot Citroen

production site where they started to produce the injected plastic bumpers. Those bumpers

were following the same quality standards as in France, and were matching the pantone of

colors required by PSA. Together with Gefco, Plastic Omnium was supplying a synchronized

flow of bumpers according to the information provided by PSA through an EDI (Electronic

Data Interface, as seen in Chapter 2 when analyzing Transactional Costs). The assembler was

informing with only 2,5 hours of anticipation which color and which trim level was required

in the production line. Within that window of time, bumpers were customized with the

requested accessories and delivered to PSA’s production site to be assembled directly to the

vehicles, without keeping any stock in the assembler’s facilities.

In Figure 5.7 we can see the decreasing relationship between International Fragmentation of

Production of Parts, and the Technological Complexity of the Part.

78

Figure 5.7 – Relationship between International Fragmentation of Production of Parts and Technological Complexity of the Part 5.3 Consequences for the Argentinean Economy and Policy Recommendations

In Chapter 2, we have focused in the effects of Fragmentation for developing countries. In

this section we will try to understand, in particular, the industrial and social effects of

Fragmentation of the Automotive Industry for the Argentinean economy, and consequently

recommend policies.

The Automotive Industry has traditionally received a strong Governmental support in several

countries, and Argentina was not an exception of that trend. In developing countries, the

interest of Governments towards the growth of Automotive Industry is based on three

different perspectives (Arza, 2007):

In a first place, automotive production usually implies significant quantities of

employment both, direct, and particularly, indirect. In Chapter 3 we mentioned that

this relationship was 5 indirect jobs every 1 direct.

In a second place, the automotive industry is considered as a relative technologically

complex industry that can generate transfers of knowledge to other manufacturing

sectors.

International Fragmentation of

Production of Parts

Technological Complexity of

the Part

Other Parts Electronic components

Centralized Production

Local Production

Engines and Gearboxes

Regional Production

79

Thirdly, as GDP per capita growths, the internal demand of vehicles increases, and

this generates demand of foreign currencies. This means that encouraging local

automotive production contributes, from a macro-economical point of view, to

currency saving.

Regarding the Fragmentation of the Automotive industry, as we have seen in Chapter 4,

Argentina moved from a strong protected market to apply measures compatible with the

WTO rules. However, the Mercosur Regional automotive market is still significantly

protected. Today’s policies are conditioned not only by international agreements, but also by

the fact that the automotive sector is dominated by a strong concentration of multinational

companies. This efficiency-oriented companies are competing with global strategies of cost

reduction and differentiation of products, in contrast, during the 1950s, strategies were

significantly different as they were based in achieving market share in their home countries.

The actual characteristics of automotive companies imply a challenge to Mercosur’s policy

makers, as on the one hand they need to take care of nationals objectives of developing

local vehicle production, on the second hand they need to create a friendly and predictable

environment for business at a regional level, and thirdly, they shouldn’t put obstacles to

companies in their seek for global competitiveness.

Consequently, policies for developing the automotive industry in Argentina have to deal with

several restrictions. Here we can mention two main factors, firstly, some possible policies

towards a protected market might go against liberalization rules of the World Trade

Organization. Secondly, as we have seen in previous chapters, Argentina is inserted in the

Regional Mercosur market but with an automotive market size about five times smaller than

the Brazilian one. When we have analyzed the splitting of activities in the second level of our

Fragmentation Map we noticed that if any R&D activity was located in the Region, it was

only in Brazil. In addition, when car-makers have to make the decision of where to produce a

vehicle within the Region (the fourth level in our Fragmentation Map), even if there is a

marked specialization of small cars in Brazil and medium cars, pick-ups and commercial

vehicles in Argentina, there is always a strong competition inside the Argentinean and

Brazilian local branches of the companies to ‘convince’ the headquarters that their location

is more convenient. Thus, it is clear that decisions regarding future investments for car

makers are based on the Regional market and not anymore on a domestic basis, and

considering the relative size of the Argentinean market, specialization of production plays a

significant role in Fragmentation decisions. One clear example is the speech of Robert

Bugmann, an executive from Volkswagen Manufacturing Direction, when the production of

the Amarok started in Argentina in 2010, he was referring always to the Regional market ‘In

South America there is a major market for pick-ups, and that affected positively in the

decision of producing in the Region’ (Infotechnology, 2011).

80

Given this restrictions, according to Arza (2007), policies to develop the Argentinean

automotive industry should be oriented, at least, towards a complementation of production

within the Mercosur Region, and ideally towards a global competitiveness.

As far as we have seen, the objective of Regional complementation of production mentioned

by Arza (2007) was partially achieved. The study of that paper analyzed different automotive

producers and their strategies of production within the Mercosur in 2006, and two out of

seven assemblers in Argentina were still having a domestic strategy at that time. From Table

5.2 we can see that all new models that started to be produced after 2006 have regional

exclusivity, indicating the acceptance of complementation of production between Argentina

and Brazil. Regarding global competitiveness, we noticed some specific cases of parts such as

the discussed VW Cordoba Case, also there are some specific models of vehicles made in

Argentina that have a significant share of its production exported out of the South American

continent, like the brand new pick-up VW Amarok, and a commercial vehicle of Mercedes

Benz called Sprinter. Only in future years we will be able to distinguish if this very specific

but interesting cases of global competitiveness are representative of new trend of the whole

Argentinean automotive industry.

When analyzing the Argentinean automotive industry in Chapter 4, we noticed two recent

periods of growth, the first one between 1991 and 1998, and the second from 2003 until the

record-beating present. In between those periods there was one of the biggest crisis of the

Argentinean economy in its whole history.

During the first period starting from 1991, and particularly after 1994 with the Mercosur

Automotive Agreement, significant investments arrived from foreign countries, employment

in assemblers and suppliers grew, but productivity was still far from international standards.

After the crisis of 2001 and the depreciation of the local currency, the Argentinean Peso,

exports starting to have an increasing importance for the automotive industry. Also in this

second period car-makers started to adopt more regional strategies. Since 2002 employment

in the automotive sector experienced a continuous growth and, as we have seen in Figure

4.5, by 2006 it already doubled the values of 2002. However, as new investments arrive and

automation of production increases, the employment in the automotive sector itself will be

less relevant and the real generation of employment will be indirect. Thus, from an

employment perspective, automotive industry is affecting positively the Argentinean

economy.

The technology transfer from the automotive industry to other manufacturing sectors is very

limited as most of the R&D activities of the Region are located in Brazil. Here one possible

policy could be giving incentives (like tax exemption or infrastructure facilities) to the

location in Argentina of specialized centers of R&D. Those centers could be focused on

specific types of R&D activities regarding the vehicles segment in which Argentina is

81

regionally preferred, like adapting global pick-ups and medium cars platform to the regional

market.

Assembler’s Headquarters require an increasing predictability regarding the often changing

rules of the regional automotive agreements to make a long-term investment plan. So actual

policies that apply to the sector need to be based on a long-term basis and not change every

four years when local Governments election process takes place. Within the actual measures

that apply to the automotive industry in Argentina we can mention incentives to exports, tax

exemptions for locating new models in the country, limits Brazilian imports (as seen with the

Flex coefficient), minimum local content of national parts, and a very significant nominal

tariff of 35 percent (the highest granted to any industry) to imports of vehicles out of the

Mercosur Region.

From analyzing the changing levels of production of the Argentinean automotive industry

between 1959 and the present (shown in the Figure 4.1), we can understand that not only

policies specifically directed towards this sector affects the production of vehicles. For

example, main conditions of the Automotive Agreement signed in 1994 did not change

significantly to explain the drop of production of 2002, but it had its origin in a deep and

broader economical crisis of the whole country. Consequently, macro-economical aspects

strongly affect a transversal sector like the automotive industry. Headquarters of the

automotive companies also need an overall stability of the economy the develop their

investment plans. In this case, general measures should be taken to generate predictability

regarding the currency change and inflation, that strongly affects the automotive industry. In

particular, considering the International Fragmentation of Production, the type of change

has a major importance as determines the measure to compare the cost of a vehicle or part

between two countries. Consequently, part of the historical record of production of vehicles

in Argentina of 2010, can be explained by the increasing demand of Brazil associated with a

depreciated Argentinean Peso in comparison to the Brazilian Real. Companies located in

Argentina prefer to export as much of their production as possible as the sale prices in Brazil

were about a 70 percent higher, as shown by ACARA (2010) the price of a Toyota Corolla was

21.700 USD in Argentina in 2010 while in Brazil it was 37.600 USD, to compare, in the US the

price of the same car in the same year was 15.450 USD.

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6. Conclusions As initially stated, this Thesis was aimed to answer the following questions: to what extent

an automotive producer company should internationally fragment its production to serve

the Argentinean market? Considering that the actual cost-driven automotive industry is in

continuous seek for efficiency, we were willing to understand if a car should be fully

designed and produced in Argentina, if it should be completely produced abroad and

exported to the local Argentinean market or if the best position is an in between point. As a

consequence of the first question, a second question emerged: in case some part of the

production of a car is worth to be internationally fragmented in Argentina, can Argentina

become a global producer for a specific type of vehicle or part?

By reviewing the literature about International Fragmentation of Production we understood

that a production process can be split into different production blocks coordinated by

services links, and that economies of scale play a huge role in defining the overall efficiency

of the system. And efficiency is what automotive companies are always looking for. Later we

have seen that the International Fragmentation of Production is growing worldwide

representing a 30 percent of the world trade, and that it grows event faster within regional

economic groups (like EU or Mercosur). All this growing trend could be explained because it

allows to allocate different stages of production where they can be more efficient and at

lower costs. A potentially negative side is that it generates a growing interdependency

between countries as production sharing increases.

Besides the negative aspects, the Automotive industry embraced this International

Fragmentation of Production becoming one of the most ‘fragmented’ industries, at least

regarding the value traded of parts and components. Fragmentation is also important for

developing countries, by performing locally part of a bigger international production process

they will, on the one hand, gain access to market networks for exporting, and on the other

hand, benefit from technology transfer. The specialization in specific parts of a process can

give global presence to developing countries that wouldn’t be able to be competitive in the

international markets with the whole production process. We have identified four factors

that favor fragmentation. Firstly, trade tariffs should be low enough to permit production

sharing at international levels as the product or its components will cross national borders

repeated times during the production process. Secondly, transportation costs needed to be

considered as a good might travel long distances before reaching the end of the process.

Thirdly, labor costs, as differences between wage rates of developed and developing

countries are one of the major drivers of international production sharing. In fourth place,

but probably the most important factor, we mentioned the Governmental policies that

strongly affects international fragmentation as we have seen with the protected Mercosur

market.

83

When analyzing the actual situation of the automotive industry, we have identified four

main trends. Firstly, there is a growing importance of developing countries both in

consumption and in production of cars, in contrast with overcapacity and saturation of the

Triad markets. Secondly, the automotive industry is moving towards an increasing

concentration of players as different companies are merging to gain access to markets

where they weren’t present (for example, the Renault-Nissan Group now has strong

presence both in Europe as in Asia and the US). Thirdly, the relationship between assemblers

and providers is getting closer, as design activities are transferred from assemblers to

suppliers, the flow of sub-assemblies increases (rather than individual components), and

assemblers become more involved in the production and quality systems of their suppliers.

This resulted in a pyramidal organization of different layers of suppliers and in increasing

employment in auto-parts companies over assemblers (with a two thirds – one third ratio).

In the fourth place, we noticed an increasing standardization of vehicle platforms for each

producer, that aims to reduce development costs, obtain economies of scale and facilitate a

more flexible allocation of production in different regions.

In this global automobile market, the competitive position of an individual manufacturer no

longer depends exclusively on traditional factors like productivity or innovative capacity.

Instead, the competitive position is also a function of the design of the international value

chain. Consequently, a main issue is how value activities should be distributed geographically

to enable a company to compete with its rivals. Designing their Global Production Systems

we have seen that assemblers prefer to be ‘followed’ by their existing suppliers in their

already established markets to their new production location. The purpose of this strategy

called Follow Sourcing is to guarantee the same quality standards and coordination

mechanisms in every different production site wherever it is located. Preparing to answer

our initial questions we have studied the main drivers of Centralization and Decentralization

strategies in the automotive industry. Within the Centralization drivers we mentioned in first

place the economies of scale, and also other factors such an easier coordination and higher

confidentiality as everything happens in one site. Between the Decentralization factors we

considered in first place the comparative cost advantages, and an the possibility to access to

protected markets.

By studying examples of Regional Production Networks we understood that the integration

of different countries in a broader production system often occurs at a regional (rather than

global) level. We have clustered the role of developing countries in Regional markets in two

groups. The first group consisted in countries on the periphery of the industrially advanced

Triad countries that are incorporated into their productive structures (for example Mexico

with the North American auto production system, or Eastern Europe with Western Europe).

The second group are emerging markets clustered as independent production and

consumption spaces (like the Mercosur).

84

But before being part of the Mercosur, Argentina had already several years of automotive

production history, starting its mass production of vehicles in the 1950s. Besides some

relatively short periods, the automotive industry in Argentina was always under a protected

regime. During the 20th Century the levels of production of Argentinean vehicles suffered

significant changes, mainly due to macro-economic factors, before starting a continuous

period of growth in 2003 arriving to the historical record of 720.000 units produced in 2010.

The actual Argentinean automotive industry exports have Brazil as its very main destination,

with an 88 percent of total exports for vehicles in 2009 and a 66 percent of the total exports

of parts in 2010, also one out of two vehicles sold in Argentina in 2009 was made in Brazil.

After considering this numbers, it is clear that Argentina is immersed in a Regional

Production System together with Brazil, and consequently, we need to consider a medium

step of fragmentation between the global and the domestic production, that is the regional

alternative.

Thus, instead of considering just the problem of serving the Argentinean domestic market,

we considered the Argentinean market as part of the Mercosur regional market. To identify

what parts of the production can be fragmented we developed a Fragmentation Map (that

can be seen in Figure 5.1). After analyzing each level of the Map, we detected the following

characteristics:

1. There is an increasing relationship between the International Fragmentation of

Production and the Market Size of the vehicle. A total of 8 automotive companies

concentrate 90 percent of the Brazilian-Argentinean market (in 2010). The most

massive segments (Small cars, Medium cars, Pick-ups and Commercial vehicles)

represent 97 percent of the total sales (in 2010). All those 8 assemblers were

producing in Regionally (if available in their catalogue) their vehicles belonging to the

most massive segments. Other companies with lower market share were importing

their vehicles from outside the region even for the massive segments, following a

Centralized strategy. Also all vehicles belonging to the Large cars, and Premium

categories (less than 3 percent of the total sales) were imported from outside the

region.

2. There is a decreasing relationship between International Fragmentation of R&D

Activities and the Value Added of those Activities. Main value adding R&D activities

like concept development and vehicle design are Centralized in the home countries

of the companies or other Triad locations. The only R&D activities performed

Regionally are adapting existing global platforms to the local market.

3. There are no specific conditions that might favor Argentina or Brazil regarding

International Fragmentation of Assembly and Supply. Due to a market regulated by

the Bilateral Agreement, there is no specific trend in specialization in Assembly or

Supply between both countries.

85

4. There is an increasing relationship between International Fragmentation of

Production in Argentina of different vehicle segments, and the relative importance

of the market share of those segments in the Argentinean market with respect to

the Brazilian market. This statement might seem complex, but it is easier to

understand it if ones considers that Argentina is specialized in Medium cars, Pick-ups

and Commercial vehicles and Brazil is producing Small cars. To understand if there is

a pattern of production of vehicles within the Region, we analyzed all vehicles

actually produced in Argentina considering if their production is exclusive for the

Region (that is, if the model is not produced in Brazil). All models of Medium cars,

Pick-ups and 98 percent of Commercial Vehicles units produced in Argentina have

regional exclusivity. The specialization of Argentina in this type of vehicles is

explained because those three categories represent almost a 45 percent of the

Argentinean market, and the same three categories in Brazil represent less than a 25

percent of the market.

5. There is a decreasing relationship between the International Fragmentation of

Production of Parts and the Technological Complexity of the Part. After analyzing

the Argentinean balance of trade for different type of parts and different sources, we

noticed that parts with high technological complexity like electronic components,

were mainly imported (Centralized Production), for parts like engines and gearboxes

(with medium technological content) the trade was in both ways (imports and

exports, showing Regional Production), for simpler parts even if there were net

imports, the traded value was much lower (Domestic Production).

At this point we are able to answer the questions that originated this Thesis.

Considering the first question regarding the extent that an automotive producer company

should internationally fragment its production to serve the Argentinean market in a cost-

reducing and efficient way, we can say that firstly that will depend on which segment of the

Argentinean market is willing to serve. Actually, in order to reach economies of scale and

achieve the desired efficiency he might not will to serve only the Argentinean market, but

also the Brazilian one, that is to serve the Regional market. If the segment he wants to serve

is the Large cars, the Premium vehicles or other category with low market size, the most

efficient way to serve the market is by importing the vehicle produced in a centralized

location that can benefit from economies of scale. In addition, if the producer company is

not belonging to the selected group of 8 car-makers that represents the 90 percent of the

sales, probably even if he is willing to serve the most massive segments he will need to apply

a centralized strategy to achieve the necessary economies of scale to be competitive. In case

his market share is significant enough, that is, he belongs to a best-seller company (one of

the 8 group) and he is willing to serve a massive segment (small cars, medium cars, pick-ups

86

or commercial vehicles) then economies of scale will allow him to produce in the Region.

According to our study, if he wants to serve the small cars segment of the Region he will

produce in Brazil, and if he want to serve the medium cars, pick-ups or commercial vehicles

segments he will produce in Argentina for the whole Region.

Regarding the second question, that is, in case some part of the production of a car is worth

to be internationally fragmented in Argentina, can Argentina become a global producer for a

specific type of vehicle or part? Here we can say, firstly, that the production of medium cars,

pick-ups and commercial vehicles for certain car-makers reaching enough market size is

worth to be located in the Argentina, that is, has less cost than importing from abroad (at

least under the protected market rules). Automotive producers located in Argentina passed

from a domestic strategy to a regional strategy. Most of the evidence we have seen indicates

that the Regional strategy is being consolidated with increasing specialization of production.

This increasing specialization could generate higher efficiency and that might drive the

Regional automotive industry towards a Global reach. Actual examples of Global

competitiveness, are still limited to the discussed Volkswagen Cordoba Case that exports 40

percent of its production of gearboxes out of the Mercosur Region and some models of

vehicles made in Argentina that have a significant share of its production exported out of the

South American continent, like the brand new pick-up VW Amarok, and a commercial vehicle

of Mercedes Benz called Sprinter. Only in future years we will be able to distinguish if this

very specific and interesting cases of global competitiveness are representative of a new

trend of the whole Argentinean automotive industry.

Regarding the actual policies and the present historical record of production and sales, we

should mention that specific protective measures towards the Regional automotive market

seem to be working properly as new investments and new vehicle models are arriving to the

Mercosur region. In particular, I think that Argentina should start applying some of the

mentioned measures to develop, at least at a basic level, R&D activities in a local basis. A

natural way to increase those activities, and the associated knowledge transfer, seems to be

the specialization of R&D in parallel with the regional specialization of production. And

finally, but of major importance, we need to understand that the automotive industry is

connected transversally with different economic sectors, and that the general macro-

economic measures strongly affect it.

Recommendations for future research Concerning my recommendations for further research and the International Fragmentation

of Production of the Automotive Industry in Argentina, one point that should be considered

is what would occur if the Regional Mercosur market leaves apart the protective measures

and moves towards a free commerce or a more open economies due to a set of bilateral

87

agreements with countries from outside the Region. An assessment of the competitiveness

of the automotive industry should be performed. This will also contribute to identify if the

Argentinean automotive industry can become a Global producer for a specific type of part or

vehicle.

Another further research line could determine how the International Fragmentation of

Production in the automotive industry would be affected with the new technologies that are

going to replace (sooner or later) the combustion engine. Within the new technologies we

can mention fully electric cars, and hydrogen powered cars, both types of technologies imply

a completely different conception of the automobile as the main and more complex parts

that are now present in our vehicles will not further exist. I think this will have a major

impact in Fragmentation as, for example one first tier supplier providing engines and

gearboxes (two parts that counts for an important share in the total cost of the actual

vehicles), will be replaced as simply this parts in electric cars are not necessary (the electric

engine is a completely different technology). Instead, new players will appear as some parts,

like batteries, will represent a major cost of the vehicle. I started this Thesis quoting H.

Kierzkowski for his research in International Fragmentation, and at this point I should

mention that he also performed an inspiring study of the close future of the automotive

industry (Kierzkowski, 2009).

A third line of further research, can be the analysis of International Fragmentation of

Production in different industries. In particular, one industry with very high potential to be

fragmented is the Information Technologies industry. This industry has virtually no

transportation costs, that would imply that the distance is no more a constraint to place the

right Production Block in the right region, country, city or person wherever they are located.

88

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